What is Supply Chain Management (SCM)?

What is Supply Chain Management (SCM)? Supply chain management (SCM) is the active management of supply
chain activities to maximize customer value and achieve a sustainable competitive advantage. It represents a
conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways
possible. Supply chain activities cover everything from product development, sourcing, production, and logistics, as
well as the information systems needed to coordinate these activities. The concept of Supply Chain Management
(SCM) is based on two core ideas: The first is that practically every product that reaches an end

Supply Chain Management Concepts

Shortly after your alarm clock goes off and the coffee maker kicks on, the aroma of your favorite
coffee fills the air. The supply chain is responsible for getting those coffee beans across the world
and to your kitchen. Something so common in every household, takes a great deal of planning,
demand forecasting, procurement, and logistical expertise to move those beans to local sellers
while still fresh. Without a strong supply chain in place, your caffeine-fix options would be
severely limited.

SCM involves a series of key activities and processes that must be completed in an efficient
(fuel-conserving, cost-reducing, etc.) and timely manner. Otherwise, product will not be available
when needed by consumers like you.

The Seven Rights of Fulfillment

The ability to meet customer requirements, for everything from coffee beans to Crocs, is built
upon the expectation that everything is done correctly in the supply chain. And that means doing
it right the first time – no mulligans, no mistakes are allowed. In the quest to provide quality
service and satisfy customers, world-class companies along the supply chain are guided by the
Seven Rights of Fulfillment.

If you think about it, every order needs to be executed according to these seven goals. You must
attempt to deliver a “perfect order” to every customer every time. Doing it right the first time
makes the customer happy, saves the cost of fixing errors, and doesn't require extra use of
assets. Thus, every part of the organization has a vested interest in pursuing perfection.

A “perfect order” delivery is only attained when all Seven Rights of Fulfillment are achieved. To
accomplish a perfect order fulfillment, the seller has to have your preferred product available for
order, process your order correctly, ship the entire order via the means that you request, provide
you with an advanced shipping notification and tracking number, deliver the complete order on
time and without damage, and bill you correctly. A seller’s ultimate goal is to make the customer
happy by doing the job right, which gives them a good reason to use the seller’s services again in
the future.
SCM Flows
If the goal of SCM is to provide high product availability through efficient and timely fulfillment of
customer demand, then how is the goal accomplished?

Obviously, you need effective flows of products from the point of origin to the point of
consumption. But there’s more to it. Consider the diagram of the fresh food supply chain. A two-
way flow of information and data between the supply chain participants creates visibility of
demand and fast detection of problems. Both are needed by supply chain managers to make
good decisions regarding what to buy, make, and move.

Other flows are also important. In their roles as suppliers, companies have a vested interest in
financial flows; suppliers want to get paid for their products and services as soon as possible and
with minimal hassle. Sometimes, it is also necessary to move products back through the supply
chain for returns, repairs, recycling, or disposal.

Because of all the processes that have to take place at different types of participating companies,
each company needs supply chain managers to help improve their flows of product, information,
and money. This opens the door of opportunity to you to to a wide variety of SCM career options
for you!

SCM Processes
Supply chain activities aren't the responsibility of one person or one company. Multiple people
need to be actively involved in a number of different processes to make it work.

It's kind of like baseball. While all the participants are called baseball players, they don't do
whatever they want. Each person has a role – pitcher, catcher, shortstop, etc. – and must
perform well at their assigned duties – fielding, throwing, and/or hitting – for the team to be
successful.

Of course, these players need to work well together. A hit-and-run play will only be successful if
the base runner gets the signal and takes off running, while the batter makes solid contact with
the ball. The team also needs a manager to develop a game plan, put people in the right
positions, and monitor success.

Winning the SCM “game” requires supply chain professionals to play similar roles. Each supply
chain player must understand his or her role, develop winning strategies, and collaborate with
their supply chain teammates. By doing so, the SCM team can flawlessly execute the following
processes:

 Planning – the plan process seeks to create effective long- and short-range supply chain
strategies. From the design of the supply chain network to the prediction of customer demand, supply
chain leaders need to develop integrated supply chain strategies.
 Procurement – the buy process focuses on the purchase of required raw materials, components,
and goods. As a consumer, you're pretty familiar with buying stuff!
 Production – the make process involves the manufacture, conversion, or assembly of materials
into finished goods or parts for other products. Supply chain managers provide production support and
ensure that key materials are available when needed.
 Distribution – the move process manages the logistical flow of goods across the supply chain.
Transportation companies, third party logistics firms, and others ensure that goods are flowing quickly and
safely toward the point of demand.
 Customer Interface – the demand process revolves around all the issues that are related to
planning customer interactions, satisfying their needs, and fulfilling orders perfectly.

Top Six Supply Chain Management Features

Supply chain management features allow companies to run businesses more effectively. Finding the right
software that will make your company shine is the key to a great business decision. There are a few key
supply chain management features that you want to look for when you are searching for supply chain
vendors. If you can find these six features in your software then chances are you are making a great
business decision.
Management of Inventory

One of the supply chain management features that you want to look for is excellent inventory management.
The software should be able to maintain stability with tracking of inventory as well as the finished goods.
This function should also include the ability to track materials needed for production and eliminate any
excess waste that may be costing your company extra money. This will not only help with the reducing of
cost spent on materials, but also on the issue of storage.

Managing of Orders

Another of the key supply chain management features is the ability to manage orders through your
company. Your new software should be able to manage an order from the time it is placed until the time it
is delivered as a finished product. This helps make everyone accountable for the work they do as well as
keeping everyone working efficiently. This will improve your customer service abilities when your
customer sees that they are still getting the same quality product but at a quicker rate.

Procurement

One key supply chain management feature is the ability to create lasting relationships with your clients. In
doing this you want to make sure that all tasks associated with a particular order are being tracked properly.
This will help you not only in your customer service area but also in the area of negotiating for sales. If you
are able to give a more definite finish date for a product then you are more likely to earn their trust and win
the sale.

Logistics

As your company expands, you want to make sure your software will expand with you. You want to make
sure you have a supply chain management feature that will allow your company room to grow; whether
locally or globally. This will help to save you money in the long run because no further software will need
to be purchased to keep your company running. Downtime can be the biggest cost to a company and by
choosing the right software you will not have that worry on your shoulders.
Planning and Forecasting

If your company produces a product that is popular around holiday times then you want to be able to
predict the demand you may have at a certain time of year. The right supply chain management features
will help you in this battle by looking at years past data and seeing where you will be at that same time in
the year. This is a great asset to have so that your planning and scheduling can be right on target.

Managing of Returns

Finally, the last supply chain management feature to mention is the return management. If your product is
defective or broken when it arrives at your customers’ location then chances are you are going to have a
very unhappy customer. Let your supply chain management feature handle this for you. The automatic
processing of claims is one way that the software will help eliminate this headache.

Flows in Supply Chain Management:-

1. Value Flow:-

Flow of the goods and services from vendor (suppliers) to customers (occasionally there would
be reserve logistics). Flow to vendor side is referred to as upstream and customers side as
downstream.

2. Information Flow:-

Both upstream and downstream – Upstream (against the direction of major value flow)
Includes inputs for forecasts, marketing plans, dispatch plans, production plans, procurement
qualities and timing, orders from customers/ dealers, quality feedback, warranties invoked etc.
Downstream refers to stocks available, dispatch advices, stock transfer notes, quality assurance
reports, warranties, etc.

3. Cash Flow:-

Cash Flow determines how a given value flow is financed by various players in the supply chain.
The optimal cash flow structure will be determined by the “power balances” between the vendor,
converter and customer and the relative cost of finance and other fiscal benefits between these
players.

Lesson Transcript
A marketing, communications, and supply chain professional who has a masters degree in IT Mangement.
Has been working with young professionals to develop their leadership styles.
In this lesson, we'll be looking at physical distribution and the movement of finished goods from production
to consumer. We will explore the functions of physical distribution and its importance.

Definition
Physical distribution is the group of activities associated with the supply of finished product from the
production line to the consumers. The physical distribution considers many sales distribution channels,
such as wholesale and retail, and includes critical decision areas like customer service, inventory,
materials, packaging, order processing, and transportation and logistics. You often will hear these
processes be referred to as distribution, which is used to describe the marketing and movement of
products.
Accounting for nearly half of the entire marketing budget of products, the physical distribution process
typically garnishes a lot of attention from business managers and owners. As a result, these activities are
often the focus of process improvement and cost-saving initiatives in many companies.

Importance of Physical Distribution

The importance of physical distribution to a company can vary and is typically associated with the type
of product and the necessity it has to customer satisfaction. Strategically staging products in locations to
support order shipments and coming up with a rapid and consistent manner to move the product enables
companies to be successful in dynamic markets.
Physical distribution is managed with a systems approach and considers key interrelated functions to
provide efficient movement of products. The functions are interrelated because any time a decision is
made in one area it has an effect on the others. For example, a business that is providing custom
handbags would consider shipping finished products via air freight versus rail or truck in order to expedite
shipment time. The importance of this decision would offset the cost of inventory control, which could be
much more costly. Managing physical distribution from a systems approach can provide benefit in
controlling costs and meeting customer service demands.

Functions of Physical Distribution

The key functions within the physical distribution system are:

 Customer service
 Order processing
 Inventory control
 Transportation and logistics
 Packaging and materials

The customer service function is a strategically designed standard for consumer satisfaction that the
business intends to provide to its customers. As an example, a customer satisfaction approach for the
handbag business mentioned above may be that 75% of all custom handbags are delivered to the
customer within 72 hours of ordering. An additional approach might include that 95% of custom handbags
be delivered to the customer within 96 hours of purchase. Once these customer service standards are set,
the physical distribution system is then designed to attain these goals.
Order processing is designed to take the customer orders and execute the specifics the customer has
purchased. The business is concerned with this function because it directly relates to how the customer is
serviced and attaining the customer service goals. If the order processing system is efficient, then the
business can avoid other costs in other functions, such as transportation or inventory control. For
example, if the handbag business has an error in the processing of a customer order, the business has to
turn to premium transportation modes, such as next day air or overnight, to meet the customer service
standard set out, which will increase the transportation cost.
Inventory control is a major role player in the distribution system of a business. Costs include investment
into current inventory, loss of demand for products, and depreciation. There are different types of
inventory control systems that can be implemented, such as first in-first out (or FIFO) and flow through,
which are methods for businesses to handle products.

What are Intermediaries?

The term intermediaries can be defined as any dealer who acts as a link in the chain of
distribution between the company and its customers. (Lubbe 2000)
In the tourism industry, travel agents, tour operators etc. are considered the intermediaries
(distributors). Their main task is to bring buyers and sellers in the field together and reduce
transaction and supply/ownership costs between buyer and seller, instead of completely
eliminating an intermediary (such as a distributor).

Benefits of Tourism Intermediaries

For the producer:
 they are able to sell in bulk (for example: hotels) and might be able to transfer a certain risk
to the
 tour operator depending on the contracts made
 reduce promotion costs

For the Consumer:

 avoids search and transaction costs (by purchasing inclusive tour)

 gain from specialist knowledge of tour operator
 often gain most from lower prices

Disadvantages of Tourism Intermediaries

The use of intermediaries by producers, such as hotels, will result in the loss of margins and in
the loss of influence in the distribution process.
For the consumer choice may be reduced and prices increase, especially with the further
concentration and consolidation of tourism intermediaries.

Types of Marketing Intermediaries

Agents/Brokers

Agents or brokers are individuals or companies that act as an extension of the manufacturing
company. Their main job is to represent the producer to the final user in selling a product.
Thus, while they do not own the product directly, they take possession of the product in the
distribution process. They make their profits through fees or commissions.

Wholesalers

Unlike agents, wholesalers take title to the goods and services that they are intermediaries
for. They are independently owned, and they own the products that they sell. Wholesalers do
not work with small numbers of product: they buy in bulk, and store the products in their own
warehouses and storage places until it is time to resell them. Wholesalers rarely sell to the
final user; rather, they sell the products to other intermediaries such as retailers, for a higher
price than they paid. Thus, they do not operate on a commission system, as agents do.

Distributors

Distributors function similarly to wholesalers in that they take ownership of the product, store
it, and sell it off at a profit to retailers or other intermediaries. However, the key difference is
that distributors ally themselves to complementary products. For example, distributors of
Coca Cola will not distribute Pepsi products, and vice versa. In this way, they can maintain a
closer relationship with their suppliers than wholesalers do.

Retailers

Retailers come in a variety of shapes and sizes: from the corner grocery store, to large
chains like Wal-Mart and Target. Whatever their size, retailers purchase products from
market intermediaries and sell them directly to the end user for a profit.

Objectives Of Distribution
The main objectives of distribution in marketing are as follows:
1. Movement of goods

The main objective of distribution is to make flow of goods from production place
toconsumption place. For this, the role of the distribution channel system and its members
becomes very important.

2. Availability of goods

The objective of distribution function is to make or supply necessary goods to the large masses of
customers living indifferent geographical areas.

3. Protection of goods

The objective of distribution is also to properly storing, handling and protecting the goods and
supplying them to the consumers in good condition.

4. Cost reduction

The objective of distribution is also to reduce cost of product by bringing effectiveness in distribution
process.

5. Customer satisfaction

The other objective of distribution function is to help consumers feel satisfied through effective
distribution.

6 Important Objectives of Effective Distribution Channel

A distribution channel is a network of firms that are interconnected in their quest to provide sellers
a means of infusing the marketplace with goods and buyers a means of purchasing those goods,
doing all as efficiently and profitably as possible.

The channels of distribution are designed to achieve following objectives:

1. Product Availability:
The first objective is to make available the product to the consumer who wants to buy it. The
availability has two aspects – the desired level of coverage in terms of appropriate retail outlets
and secondly, the positioning of the product within the store. Product availability is important for
consumer convenience goods, where customer does not wait to buy a particular brand. However,
for unique and important products immediate availability is less critical.

2. Meeting Customers’ Service Requirements:

To meet the service requirements and create differentiation over competitors, channels become
critical. Some of the service requirements may include – order cycle time (how long it takes to
receive, process and deliver an order), dependability (consistency and reliability of delivery),
communication between buyer and seller (to sort out problems spontaneously), convenience ((to
accommodate the special needs of different customers), and post-sale (installation, user training,
help lines, repair, and spare parts availability).
3. Promotional Support:
It includes strong support from the channel member for the firm’s product, including the use of
local media, in-store displays, and cooperation in special promotion events. This kind of support
is especially important in case of highly competitive market phenomenon, complex and expensive
consumer durables or industrial goods, or a differentiator defender is trying to attain a competitive
advantage.

4. Market Information:
Since intermediaries are in the marketplace and near to consumers they are the best and first
hand source of getting feedback with regard to sales trends, inventory levels, competitors’ moves
and customers’ reactions.

5. Cost-Effectiveness:
Costs to be incurred to attain the firm’s channel objectives should not be too much in relation to
gains. There is often a trade off between channel costs, associated with physical distribution
activities such as transportation and inventory storage, and achieving high levels of performance
on many other objectives.

6. Flexibility:
A flexible channel is one where it is relatively easy to switch channel structures or add new types
of middlemen without generating costly economic or legal conflicts with existing channel
members.

Advantages/Disadvantages Of Distrubution Channel

When a customer is considering buying a product he tries to access its value by looking at
various factors which surround it. Factors like its delivery, availability etc which are directly
influenced by channel members. Similarly, a marketer too while choosing his distribution
members must access what value is this member adding to the product. He must compare the
benefits received to the amount paid for using the services of this intermediary. These benefits
can be the following:

 Cost Saving

The members of distribution channel are specialized in what they do and perform at much lower
costs than companies trying to run the entire distribution channel all by itself.

 Time Saving

Along with costs, time of delivery is also reduced due to efficiency and experience of the channel
members. For example if a grocery store were to receive direct delivery of goods from every
manufacturer the result would have been a chaos. Everyday hundreds of trucks would line up
outside the store to deliver products. The store may not have enough space for storing all their
products and this would add to the chaos. If a grocery wholesaler is included in the distribution
chain then the problem is almost solved. This wholesaler will have a warehouse where he can
store bulk shipments. The grocery store now receives deliveries from the wholesaler in amounts
required and at a suitable time and often in a single truck. In this way cost as well as time is
saved.

 Customer Convenience

Including members in the distribution chain provides customer with a lot of convenience in their
shopping. If every manufacturer owned its own grocery store then customers would have to visit
multiple grocery stores to complete their shopping list. This would be extremely time-consuming
as well as taxing for the customer. Thus channel distribution provides accumulating and assorting
services, which means they purchase from many suppliers the various goods that a customer
may demand. Secondly, channel distribution is time saving as the customers can find all that
they need in one retail store and the retailer

 Customers can buy in small quantities

Retailers buy in bulk quantities from the manufacturer or wholesaler. This is more cost effective
than buying in small quantities. However they resell in smaller quantities to their customers. This
phenomenon of breaking bulk quantities and selling them in smaller quantities is known as bulk
breaking. The customers therefore have the benefit of buying in smaller quantities and they also
get a share of the profit the retailer makes when he buys in bulk from the supplier.

 Resellers help in boosting sales

Resellers often use persuasive techniques to persuade customers into buying a product thereby
increasing sales for that product. They often make use of various promotional offers and special
product displays to entice customers into buying certain products.

 Customers receive financial support

Resellers offer financial programs to their customers which makes payment easier for the
customer. Customers can buy on credit, buy using a payment plan etc.

 Resellers provide valuable information

Manufacturers who include resellers for selling their products rely on them to provide information
which will help in improving the product or in increasing its sale. High-level channel members
often provide sales data. On all other occasions the manufacturer can always rely on the reseller
to provide him with customer feedback.

Disadvantages of including intermediaries in the distribution channel

 Revenue loss
The manufacturer sells his product to the intermediaries at costs lower than the price at which
these middlemen sell to the final customers. Therefore the manufacturer goes for a loss in
revenue. The intermediaries would never offer their services to the manufacturer unless they
made a profit out of selling his products. They are either made a direct payment by the
manufacturer, for instance shipping costs or as in the case of retailers by selling the product at
costs higher than the price at which the product was bought from the manufacturer (also known
as markup). The manufacturer could have sold at this final price and made a greater profit if he
had been managing the distribution all by himself.

 Loss of Communication Control

Along with loss over the revenue the manufacturer also loses control over what message is being
conveyed to the final customers. The reseller may engage in personal selling in order to increase
the product sale and communicate about the product to his customers. He might exaggerate
about the benefits of the product this may lead to miscommunication problems with end users.
The marketer may provide training to the salespersons of retail outlets but on the whole he has
no control on the final message conveyed.

 Loss of Product Importance

The importance given to a manufacturer�s product by the members of the distribution channel
is not under the manufacturer�s control. In various cases like transportation delays the product
loses its importance in the channel and the sales suffer. Similarly a competitor�s product may
enjoy greater importance as the channel members might be getting a higher promotional
incentive.

8 Factors to Consider While Selecting Distribution Channels

Some of the factors to consider while selecting channels of distribution are as follows: (i) Product

(ii) Market (iii) Middlemen (iv) Company (v) Marketing Environment (vi) Competitors (vii)

Customer Characteristics (viii) Channel Compensation.

We have to consider the following factors for the selection of channel of

distribution:
(i) Product:

Perishable goods need speedy movement and shorter route of distribution. For durable and

standardized goods, longer and diversified channel may be necessary. Whereas, for custom made

product, direct distribution to consumer or industrial user may be desirable.

Also, for technical product requiring specialized selling and serving talent, we have the shortest

channel. Products of high unit value are sold directly by travelling sales force and not through

middlemen.

(ii) Market:

(a) For consumer market, retailer is essential whereas in business market we can eliminate

retailing.

(b) For large market size, we have many channels, whereas, for small market size direct selling

may be profitable.

(c) For highly concentrated market, direct selling is preferred whereas for widely scattered and

diffused markets, we have many channels of distribution.

(d) Size and average frequency of customer’s orders also influence the channel decision. In the

sale of food products, we need both wholesaler and retailer.

Customer and dealer analysis will provide information on the number, type, location, buying

habits of consumers and dealers in this case can also influence the choice of channels. For

example, desire for credit, demand for personal service, amount and time and efforts a customer

is willing to spend-are all important factors in channels choice.

(iii) Middlemen:

(a) Middlemen who can provide wanted marketing services will be given first preference.

(b) The middlemen who can offer maximum co-operation in promotional services are also

preferred.

(c) The channel generating the largest sales volume at lower unit cost is given top priority.

(iv) Company:

(a) The company’s size determines the size of the market, the size of its larger accounts and its

ability to set middlemen’s co-operation. A large company may have shorter channel.

(b) The company’s product-mix influences the pattern of channels. The broader the product- line,

the shorter will be the channel.

If the product-mix has greater specialization, the company can favor selective or exclusive

dealership.

(c) A company with substantial financial resources may not rely on middlemen and can afford to

reduce the levels of distribution. A financially weak company has to depend on middlemen.

(d) New companies rely heavily on middlemen due to lack of experience.

(e) A company desiring to exercise greater control over channel will prefer a shorter channel as it

will facilitate better co-ordination, communication and control.

(f) Heavy advertising and sale promotion can motivate middlemen in the promotional campaign.

In such cases, a longer chain of distribution is profitable.

Thus, quantity and quality of marketing services provided by the company can influence the

channel choice directly.

(v) Marketing Environment:

During recession or depression, shorter and cheaper channel is preferred. During prosperity, we

have a wider choice of channel alternatives. The distribution of perishable goods even in distant

markets becomes a reality due to cold storage facilities in transport and warehousing. Hence, this

leads to expanded role of intermediaries in the distribution of perishable goods.

(vi) Competitors:

Marketers closely watch the channels used by rivals. Many a time, similar channels may be

desirables to bring about distribution of a company’s products. Sometimes, marketers

deliberately avoid channels used by competitors. For example, company may by-pass retail store

channel (used by rivals) and adopt door-to-door sales (where there is no competition).

(vii) Customer Characteristics:

This refers to geographical distribution, frequency of purchase, average quantity of purchase and

numbers of prospective customers.

(viii) Channel Compensation:

This involves cost-benefit analysis. Major elements of distribution cost apart from channel

compensation are transportation, warehousing, storage insurance, material handling distribution

personnel’s compensation and interest on inventory carried at different selling points.

Distribution Cost Analysis is a fast growing and perhaps the most rewarding area in marketing

cost analysis and control.

COMPREHENSIVE DISTRIBUTION CHANNEL MANAGEMENT

"Few tech vendors are immune to the millions of dollars in lost revenue that amount from overpayment of
channel incentives, stock-outs, gray market activity, and audit penalties/fines. Having suffered
from limited channel sales and marketing visibility, many tech vendors are doubling down on
channel enablement services and technologies to counter this recurring hit to profitability. The are
investing in .. to help them optimize incentives, inventory, revenue recognition, and compliance
management processes." - Jonathan Silber, Forrester Research

Every year companies lose billions of dollars in their distribution channel operations through a
combination of lost revenue opportunities and leakage, channel inefficiencies and lack of tight
compliance disciplines.

WHAT IS DISTRIBUTION CHANNEL MANAGEMENT?

Distribution channel management is the collective set of activities and operations B2B firms
employ to get their product to market via channel partners as efficiently and effectively as
possible. These include but are not limited to the following business impact areas:

 Sales Forecasting
 Channel Marketing Management
 Inventory Management
 Incentive Program Management
 Revenue Recognition
 Financial Compliance and Risk Management
 Data Integrity

On a day-to-day basis, many channel-centric companies are overpaying commissions to

partners, losing business due to stockouts, under-collecting royalties, and missing out on huge
new sales opportunities. Many are also at risk for noncompliance penalties due to records that
aren't audit-ready, specifically regarding timely closing and revenue recognition.

Most companies are constantly struggling to address all this ever-growing complexity with
inefficient, piecemeal approaches and an overworked staff who is always a couple steps behind
the curve. Current systems are incomplete in data reconciliation, automation, analytics and
integration with other enterprise applications. They often succumb to believing whatever their
partners say and paying claims without question in order not to rock the boat.

Worse yet, some companies have simply adopted a culture of acceptance that the
complexity, inefficiency and profit leakage in their go-to-market channels are just “necessary
evils” that can’t be resolved. So they’ve settled into a pattern of ignoring the issues and accepting
the losses.
Definition: Distribution Channel Management
As the name implies, it is the whole process of delivering a product/service from the manufacturer to the end customer. It
is also known as marketing channel.

It is subdivided into 2 categories:

1. Direct Channel: The seller/supplier directly sells the product to the customer in direct channel. He himself choose the
medium; be it ecommerce or through stores. It requires hiring of few sales people or building operations for ecommerce
website.

2. Indirect Channel: A specialized intermediary is added in this type of channel as they have the required contacts,
experience and scale of operations. He might be a consultant, Original Equipment manufacturer (OEMs), etc. The reason
for this includes the efficiency of distribution costs.

For eg:
A Toyota dealer will depend on a lot of factors to persuade customers, such as other dealers and the motor company itself.
He needs to ensure its sales are on a rise and the service which they provide is worthy of customer’s trust. So basically, the
whole trust of Toyota depends upon the distribution channel.

Hence, this concludes the definition of Distribution Channel Management along with its overview.
Browse the definition and meaning of more terms similar to Distribution Channel Management. The Management
Dictionary covers over 7000 business concepts from 6 categories.

International Retailing - Meaning and Important Concepts

International trade and commerce has existed for centuries and played a very important part in the World History.
However International Retailing has been in existence and has gained ground in the past two to three decades. The
economic boom in several countries, coupled with globalization have given way to Organisations looking at setting
up retailing across borders. The advent of internet and multimedia has further changed the dimensions as far as
International Retailing is concerned.

Who are the International Retailers

When you think of International Retailers the names that come to one’s mind would be the Wal-Mart, Gucci, Ralph
Lauren, Mango, GAP etc. All of these are International Retailers. However we can broadly classify the International
Retailers under two categories. The first category would be the global grocery retailers and the second category belongs to
the International fashion Brands.

International Grocery Retailers

The Companies namely Wal-Mart, Carrefour, Metro, Tesco and Ahold etc are the leading international grocery retailers
who have multi country presence. Major portion of their total revenue comes from foreign sales. Wal-Mart operates in
over 8,500 stores in 15 countries with foreign sales contributing to 18% of its $405,046 billion net sales (2000). Carrefour,
a French international retailer has presence in 32 countries with foreign sales amounting to over 48% of its net sales.

These international grocery retailers follow a multi brand and multi product business format which includes all products
like food encompassing all types of fresh vegetables, fruits, juices, chocolates etc, fashion and clothing including bed linen
etc, grocery, all types of branded consumables, as well as liquor and many more household goods under one roof. They
generally follow a format that allows for selling to whole sellers, retailers as well as general public at the mega stores.

Traditionally these International Grocery Retailers have operated mainly in US and in Europe. Specifically in Europe the
largest markets have been in Germany, France and UK. With globalisation and with several countries opening their
markets to FDI in retail, these Organisations are moving into other parts of the world and into emerging markets.

There is yet another group of International retailers like IKEA, Lego, Toys ‘R’Us etc who have chosen to focus and
specialise in a particular segment like furniture etc.

International Fashion Retailing

Names like Ralph Lauren, Gucci, Zara, Hugo Boss, JC Penny, Benetton, Jimmy Choo, Swarovski, Dolce & Gabbana etc
belong to the second category of International Fashion Retailers. Originally these Companies catered to domestic markets
in the countries of their origin. Fashion and Luxury brands have always been known by their label and brand value across
countries, through word of mouth and sought after by the rich and famous from all over. Over the years, these companies
have realised the opportunity in expanding their product mix and promoting their brands internationally. Thus we see the
emergence of international fashion brands, luxury product brands dealing exclusively with branded clothing including
sportswear, casual and formal wear, party wear, foot ware and accessories, luxury items including watches, perfumes,
jewellery and many more items of personal use.

In the earlier times, the nova rich and the business class were the main customers who sourced these branded products
from abroad. However in the recent times we see the educated and economically empowered youth demanding fashion and
going in for branded items. International brands have thus established a niche for themselves in domestic markets aided by
the increasing demand for branded fashion products. International grocery retailers have expanded their business in
emerging markets by virtue of their investments and procurement strategies.

Is Logistics the Same as Supply Chain Management?

Supply chain management links major business processes to create a higher performance
business model that drives competitive advantage. Logistics is one of several activities that make
up a supply chain.
The terms logistics and supply chain management are sometimes used interchangeably. Some
say there is no difference between the two terms, that supply chain management is the “new”
logistics.

To compound this, what is considered supply chain management in the United States is more
commonly known as logistics management in Europe, according to the blog for PLS Logistics
Services, a logistics management firm in Pennsylvania.

When the question was posed in an Inbound Logistics article, the answers varied based on the
functions a supply chain (or logistics) professional handled. Some thoughts from their readers:

o “There isn't a difference today,” said Wayne Johnson of American Gypsum.

o “Supply chain management incorporates the field of logistics. Logistics is a number of sub-
processes within SCM,” said Michael Kirby of National Distribution Centers.
o “A ‘supply chain management’ company is generally a third-party operator managing the
total overall movement of product whether inbound or outbound,” said William Behrens of
Associated Transport Systems, Inc.

Purchasing, materials handling, logistics, transportation, inventory control and supply chain
management have continued to evolve, causing many of these functional areas to intersect with
one another. This intersection has resulted in blurred definitions for some of these terms such as
logistics and supply chain management.
While these two terms do have some similarities they are, in fact, different concepts with different
meanings. Supply chain management is an overarching concept that links together multiple
processes to achieve competitive advantage, while logistics refers to the movement, storage and
flow of goods, services and information within the overall supply chain.

What is Supply Chain Management?

Supply chain management, as explained by Michigan State University professors Donald Bowersox, David Closs and M.
Bixby Cooper in Supply Chain Logistics Management, involves collaboration between firms to connect suppliers,
customers and other partners as a means of boosting efficiency and producing value for the end consumer. The book
considers supply chain management activities as strategic decisions, and set up “the operational framework within which
logistics is performed.”

It is the efforts of a number of organizations working together as a supply chain that help manage the flow of raw materials
and ensure the finished goods provide value. Supply chain managers work across multiple functions and companies to
ensure that a finished product not only gets to the end consumer, but meets all requirements as well. Logistics is just one
small part of the larger, all-encompassing supply chain network.

What is Logistics?
The Council of Supply Chain Management Professionals defines logistics as “part of the supply chain process that plans,
implements and controls the efficient, effective forward and reverse flow and storage of goods, services and related
information between the point of origin and the point of consumption in order to meet customer’s requirements.”

Bowersox, Closs and Cooper define logistics as activities – transportation, warehousing, packaging and more – that move
and position inventory and acknowledge its role in terms of synchronizing the supply chain.

The objective behind logistics is to make sure the customer receives the desired product at the right time and place with
the right quality and price. This process can be divided into two subcategories: inbound logistics and outbound logistics.

Inbound logistics covers the activities concerned with obtaining materials and then handling, storing and transporting them.
Outbound logistics covers the activities concerned with collection, maintenance and distribution to the customer. Other
activities, such as packing and fulfilling orders, warehousing, managing stock and maintaining the equilibrium between
supply and demand also factor into logistics.

Logistics Costs
Logistics costs are defined differently by different companies. Some companies do not account interest and depreciation
on inventories as logistic costs. Others include the distribution costs of their suppliers or the purchasing costs. In some
cases, even the purchase value of the procured goods is included in the logistic costs. So, there is no generic definition of
this term but every company needs to define the logistics costs for itself and the KPI’s it will be tracking to lower the
costs.
Generally, logistics costs include:
1) Transportation costs
2) Inventory carrying costs
3) Labour Costs
4) Customer service costs
5) Rent for storage costs
6) Administration costs
7) Other costs

1. What is Logistics and Supply Chain Management?

"Logistics typically refers to activities that occur within the boundaries of a single organization and
Supply Chain refers to networks of companies that work together and coordinate their actions to
deliver a product to market. Also, traditional logistics focuses its attention on activities such as
procurement, distribution, maintenance, and inventory management. Supply Chain Management
(SCM) acknowledges all of traditional logistics and also includes activities such as marketing, new
product development, finance, and customer service" - Michael Hugos

2. What is Logistics?
"Logistics is about getting the right product, to the right customer, in the right quantity, in the right
condition, at the right place, at the right time, and at the right cost (the 7 Rs)" - John J. Coyle et al

In the past, various tasks were under different departments, but now they are under the same
department and report to the same head as below,

3. What is Logistics Management?

"Logistics Management deals with the efficient and effective management of day-to-day activity in
producing the company's finished goods and services" - Paul Schönsleben
4. What is the Difference between Inbound and Outbound Logistics?
"Inbound Logistics refers to movement of goods and raw materials from suppliers to your company. In
contrast, Outbound Logistics refers to movement of finished goods from your company to customers"

To illustrate this term, we make a small graphic as below,

As you can see, purchasing and warehouse function communicates with suppliers and sometimes
called "supplier facing function". Production planning and inventory control function is the center
point of this chart. Customer service and transport function communicates with customers and
sometimes called "customer-facing functions.

5. What is Transport and Logistics?

"Transport and Logistics refers to 2 types of activities, namely, traditional services such as air/sea/land
transportation, warehousing, customs clearance and value-added services which including information
technology and consulting"

6. What is International Logistics?

These are one of the most ambiguous groups of terms out there. They are used interchangeably and
often referred to international production and transportation activities. However, most concise
definition is as below,
"International Logistics focuses on how to manage and control overseas activities effectively as a
single business unit. Therefore, companies should try to harness the value of overseas product,
services, marketing, R&D and turn them into competitive advantage"

7. What is 3PL?
The concept of 3PL appeared on the scene in the 1980s as the way to reduce costs and improve
services which can be defined as below,
"3PL refers to the outsourcing of activities, ranging from a specific task, such as trucking or marine
cargo transport to broader activities serving the whole supply chain such as inventory management,
order processing and consulting."

In the past, many 3PL providers didn't have adequate expertise to operate in complex supply chain
structure and process. The result was the inception of another concept.

8. What is 4PL?
The 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined as below,
"4PL refers to a party who works on behalf of the client to do contract negotiations and management of
performance of 3PL providers, including the design of the whole supply chain network and control of
day-to-day operations"

You may wonder if a 4PL provider is really needed. According to the research by Nezar Al-Mugren
from the University of Wisconsin-Stout, top 3 reasons why customers would like to use 4PL providers
are as below,

- Lack of technology to integrate supply chain processes

- The increase in operating complexities

- The sharp increase in global business operations

9. What is Supply Chain?

"Supply Chain is the network of organizations that are involved, through upstream and downstream
linkages, in the different processes and activities that produce value in the form of products and
services in the hands of the ultimate consumer" - Martin Christopher

10. What is Supply Chain Management?

Each researcher defines supply chain management differently. However, we would like to provide the
simple definition as below,
"Supply Chain Management (SCM) refers to the coordination of production, inventory, location, and
transportation among the participants in a supply chain to achieve the best mix of responsiveness and
efficiency for the market being served" -Michael Hugos

To dig deeper, it has 6 important components as below,

- It's a Network: Many companies have the department that controls various activities within the
supply chain. So the people are led to believe that SCM is a "function" which it's not. It is actually a
"network" consists of many players as below,

A generic supply chain structure is as simple as Supplier, Manufacturer, Wholesaler and Retailer (it's
more complex in the real world but a simple illustration serves the purpose).

The word "management" can be explained briefly as "planning, implementing, controlling". Supply
Chain Management is then the planning, implementing and controlling of the networks.

- Information Must Flow: Another important attribute of supply chain management is the flow of
material, information and finance (money). Even though there are 3 types of flow, the most important
one is information flow aka information sharing. Let's see the example of this through the simplified
version of bullwhip effect as below,

When demand data is not shared, each player in the same supply chain must make some sort of
speculation. According to the above graphic, the retailer has a demand for 100 units, but each player
tends to keep stock more and more at every step of the way. This results in higher costs for everyone in
the same supply chain.

When information is shared from retailer down to supplier, everyone doesn't have to keep stock that
much. The result is lower cost for everyone.

- Coordination is Essential: Information sharing requires a certain degree of "coordination" (it's also
referred to as collaboration or integration in scholarly articles). Do you wonder when people started
working together as a network? In 1984, companies in the apparel business worked together to reduce
overall lead-time. In 1995, companies in automotive industry used Electronic Data Interchange to
share information. So, working as a "chain" is the real world practice.

- Avoid Conflicting Objectives: Working as a network requires the same objective, but this is often
not the case (even with someone in the same company). "Conflicting Objectives" is the term used to
describe the situation when each function wants something that won't go well together. For example,
purchasing people always place the orders to the cheapest vendors (with a very long lead-time) but
production people need material more quickly.

To avoid conflicting objectives, you need to decide if you want to adopt a time-based strategy, low-
cost strategy or differentiation strategy. A clear direction is needed so people can make the decisions
accordingly.

- Balance Cost/Service: The concept of Cost/Service Trade-off appeared as early as in 1985 but it
seems that people really don't get it.

When you want to improve service, the cost goes up. When you want to cut cost, service suffers. It's
like a "seesaw", the best way you can do is to try to balance both sides.
Real world example is that a "new boss" ask you to cut costs by 10%, improve service level by 15%,
double inventory turns and so on. If you really understand cost/service trade-off concept, you will
agree that you can't win them all. The most appropriate way to handle this is to prioritize your KPIs.

- Foster Long-term Relationship: To work as the same team, long-term relationship is a key.
Otherwise, you're just a separate company with a different strategy/agenda. So academia keeps
preaching about the importance of relationship building, but is not for everyone.

Since there are too many suppliers to deal with, portfolio matrix is often used to prioritize the
relationship building. Focus your time and energy to create the long-term relationship with suppliers of
key products and items with limited sources of supply because these are people who can make or break
your supply chain.

Difference Between Logistics and Supply Chain Management

All the activities, associated with the sourcing, procurement, conversion and logistics
management, comes under the supply chain management. Above all, it encompasses the
coordination and collaboration with the parties like suppliers, intermediaries, distributors and
customers. Logistics Management is a small portion of Supply Chain Management that deals
with the management of goods in an efficient way.

Supply Chain Management, it is a broader term which refers to the connection, right from the
suppliers to the ultimate consumer.

It has been noticed that there is a drastic change in the manner in which business was conducted
many years ago and now. Due to the improvement in the technology, which leads to the
development of all key areas of business. Supply Chain Management also evolved as an
improvement over Logistics Management, from past years. Check out this article to understand
the difference between Logistics Management and Supply Chain Management.

Comparison Chart

BASIS FOR
LOGISTICS MANAGEMENT SUPPLY CHAIN MANAGEMENT
COMPARISON

Meaning The process of integrating the movement The coordination and management of the
and maintenance of goods in and out the supply chain activities are known as Supply
 BASIS FOR
LOGISTICS MANAGEMENT SUPPLY CHAIN MANAGEMENT
COMPARISON

organization is Logistics. Chain Management.

Objective Customer Satisfaction Competitive Advantage

Evolution The concept of Logistics has been evolved Supply Chain Management is a modern
earlier. concept.

How many Single Multiple

organizations are
involved?

One in another Logistics Management is a fraction of Supply Chain Management is the new
Supply Chain Management. version of Logistics Management.

What is the Bullwhip Effect? Understanding the concept &

definition
Through the numerous stages of a supply chain; key factors such as time and supply of order
decisions, demand for the supply, lack of communication and disorganization can result in one of
the most common problems in supply chain management. This common problem is known as
the bullwhip effect; also sometimes the whiplash effect. In this blog post we will explain this
concept and outline some of the contributing factors to this issue.

What is the bullwhip effect?

The bullwhip effect can be explained as an occurrence detected by the supply

chain where orders sent to the manufacturer and supplier create larger variance
then the sales to the end customer. These irregular orders in the lower part of
the supply chain develop to be more distinct higher up in the supply chain. This
variance can interrupt the smoothness of the supply chain process as each link
in the supply chain will over or underestimate the product demand resulting in
exaggerated fluctuations.

What contributes to the bullwhip effect?

There are many factors said to cause or contribute to the bullwhip effect in
supply chains; the following list names a few:

 Disorganization between each supply chain link; with ordering larger or

smaller amounts of a product than is needed due to an over or under reaction to
the supply chain beforehand.
 Lack of communication between each link in the supply chain makes it
difficult for processes to run smoothly. Managers can perceive a product
demand quite differently within different links of the supply chain and therefore
order different quantities.
 Free return policies; customers may intentionally overstate demands due
to shortages and then cancel when the supply becomes adequate again,
without return forfeit retailers will continue to exaggerate their needs and cancel
orders; resulting in excess material.

 Order batching; companies may not immediately place an order with their
supplier; often accumulating the demand first. Companies may order weekly or
even monthly. This creates variability in the demand as there may for instance
be a surge in demand at some stage followed by no demand after.

 Price variations – special discounts and other cost changes can upset
regular buying patterns; buyers want to take advantage on discounts offered
during a short time period, this can cause uneven production and distorted
demand information.
 Demand information – relying on past demand information to estimate
current demand information of a product does not take into account any
fluctuations that may occur in demand over a period of time.

Example of the bullwhip effect

Let’s look at an example; the actual demand for a product and its materials start
at the customer, however often the actual demand for a product gets distorted
going down the supply chain. Let’s say that an actual demand from a customer
is 8 units, the retailer may then order 10 units from the distributor; an extra 2
units are to ensure they don’t run out of floor stock.

Warehouse & Distribution Center Management: 5 Tips for

Success

Every day, new warehousing and wholesale supplier businesses are opening their doors, and
plenty more are on their way out because they can’t keep up in a competitive economy. In order
to maintain a successful distribution center in this business environment, you have to run
an efficient operation in which you are constantly moving product and satisfying your
customers. To keep afloat, it is important to maintain stable business relationships by providing
reliable logistics and product delivery while keeping your costs down. In this article we’ll go over 5
ways to successfully manage your supplier business so you can fulfill all of these requirements.
Many logistics experts assert that warehouses and distribution centers are virtually the same
operation, but experts like Cliff Holste at Supply Chain Digest insist that they are not. Though
both warehouse and distribution center management operations typically take place in large
warehouse environments, the term “warehouse” refers to a traditional product storage model, and
“distribution center” refers to the more contemporary and high-velocity order fulfillment model.
Whatever model you choose, it pays to streamline your operations with the latest organizational
and technical upgrades. If you’re looking to improve operations and overall, successfully manage
your warehouse or distribution center, consider these 5 tips.
1. Take Advantage of Technological Innovation
There are some excellent technologies out there that can make your job much easier. For
example, a warehouse management system (WMS) is crucial to a modern distribution center
management. There are many different types of WMS software packages available on the
market, depending on your needs. Common functions include an advanced shipping notification
(ASN) system, which can be used to keep track of all of the inbound orders you are receiving,
which is crucial to properly coordinating shipments with crossdocking and replenishments. You
can combine this with a vendor compliance program to make incoming shipments integrate
smoothly with your operations.
Dynamic slotting modules and workflow organization systems are also important tools for
streamlining your warehouse operations. A good WMS system has a number of other useful tools
for managing orders, inventory, and shipments.
Also consider your automation options to make everything run smoother. Conveyor systems are
excellent for closing the distances that pickers have to cover. Other operations can be
successfully automated with picking towers, stretch wrap systems, robotic palletizers, and AS/RS
systems.
2. Organize Your Warehouse
Warehouses feature complex organizational schemes that can be tinkered with in a dizzying
amount of ways to increase efficiency and effectiveness. One way to think about this
organization has to do with mapping out the flow of material in the facility. From the point at which
you receive your merchandise to the point at which it leaves the warehouse to be shipped to your
customers, you should be thinking about the most efficient way to direct the flow.
The product you are offloading last should be the first to go into your truck. This is just a crude
example, but logistical questions like these will determine things like your pick path and the way
items move through your warehouse. How will your products be stored and how will they move?
What are the picking methods that achieve the most efficient results?
3. Manage Inventory
Inventory is a vital component to your operation. Are you going to specialize in a specific type of
products, or will you carry a wide variety? How much inventory are you going to have on hand at
a given time?
It is a good idea to shoot for a low inventory and high velocity of materials in this business.
Otherwise you will have to manage product shelf life and tackle other similar issues on top of
everything else.
You may carry certain stocks at different seasonal periods, or your inventory may be constantly
changing due to market trends. Your WMS can help you with dynamic slotting so you can keep
on top of your inventory.
4. Analyze Everything
This secret ties in with the first point about utilizing technology, specifically, information
technology. There are robust means of data collection and analytics available to modern supply
businesses, and you should take advantage of high data resolutions to maximize the efficiency of
every aspect of your operation.
Most of the data collection can be done automatically with features like barcode and radio
frequency identification, which can be integrated into your WMS for greater control. Other ways to
pick up data include voice-activated technology and RFID methods. You can also manually
gather data if required.
Gather as much data as you can from your picking operations. This way you can decide whether
a batch picking, zone picking, single-order, or multi-order picking methodology is going to work
best with your particular business. If you treat every product movement as a transaction, you’ll
have a greater wealth of data to determine how everything moves in your factory, which allows
for maximum efficiency.
5. Stay On Board with Your Staff
A good amount of automation and data tracking will allow you to develop effective logistics, but
your warehouse is only as efficient as your staff is effective at their jobs. It is a good idea to
implement a robust training program that provides a standard operating procedure, which
provides appropriate guidelines for working within your particular warehouse.
Training should include maintenance and operation of machinery, warehouse organization,
reporting, processes, customer service, and other essential components of your business. Labor
management software may help to keep track of your staff performance as well.
Employee feedback is always valuable, as on-the-ground information can be the best kind of
data. Keeping your employees happy with a positive work environment improves communication
and staff cohesion, which needless to say, will keep your warehouse running smooth.

Centralized Vs Decentralized Purchase

In organizations having many production centers which are situated at distant places, it may be an important issue to decide
whether for the purpose of purchasing for all the production centers, there should be only one purchase department or for each
production centre, there should be one purchase department. Upon the following factors the decision shall primarily depend:-

a. the distance between the production centers & the central godown,

b. the nature of the materials used i.e. whether the material is bulky, heavy, fragile etc. ,

c. the cost & risk involved in transport,

d. the firm’s policy in this respect; & secondarily upon the comparative advantage & disadvantage of the two systems.

Where for the purpose of purchasing for all, there is one purchase department; in that case it is referred to as centralized purchase.
When, on the other hand, when for each production center, there is a purchase department, it is referred as decentralized purchase. The
comparative advantage & the disadvantages of the two systems are as below:

From the point of View of Centralized Purchase Decentralized Purchase

1.Control On buying better control is Effective control may not be present.
exercised.
2. Terms of Purchase Due to large scale order, better terms Less favourable terms may be available.
of purchase may be available.
3. Departmental skill Economy in purchase can be obtained Skill of the staff may not develop up to
by better skill of the staff the mark.
4. Efficiency Efficiency is obtained due to Efficiency cannot be expected when
specialization purchase is made by department heads
who are loaded with other work
5. Standardization of When purchase is made by centralized From department to department
Materials purchasing department, all departments ,standards of materials may vary
can get standard materials
6. Regulation of purchase In case if centralization purchase, In case of decentralized purchase,
Policy regulation of purchase policy &giving change in purchase policy cannot be
prompt effect to any change is easy easily given effect to.
7. Initial cost Initial cost is relatively high Initial cost is relatively low.
8. Economy of staff, Economy of staff,& accommodation and More staff and more accommodation
accommodation & finance also finance can be achieved by and more finance to purchase is
centralized purchase because excess of required in decentralized purchase
stores need not be held
9. Transport cost From central go down to production From central go down to production
centres, transport cost is considerable centres, transport cost is practically nil
10. Risk in transport Fragile items are subject to risk There is no risk involved
11. Local purchase Advantage of local market cannot be Advantages of local market can be
obtained enjoyed
12. Promptness in supply of Prompt supply cannot be expected, even Prompt supply without
materials for production there may be bottlenecks bottleneck is there
13. Inter-departmental For favouritism, central supp may Chances of misunderstanding are absent
Relation sometimes be criticized and also
misunderstanding between production
 centers and central purchase
department may be there
14. Blocking of capital More working capital even sometimes Unnecessary blocking of working capital
unnecessarily , are blocked may be avoided

Thus, (a) Centralized purchase is suitable where-

1. One or several plants are closely situated.

2. For production of standard products, one basic raw material is used by the plant or plants.

3. (b) Decentralized purchase is suitable where,

1. Several plants are distantly situated.

2. For production of different materials, plants use different raw materials.

The above cannot be the firm conclusion, because centralized purchase may benefit plants which are distinctly situated but use very
costly but light materials, the reason behind this is that, negligible cost of transport is there & better control on material cost can be
achieved.

13 Important Function of Purchasing Department of an

Organisation
The purchasing department is an organisational unit of a firm whose duties include some part or
all of the purchasing function. This disconnection between function and, department is not always
appreciated or understood by top management.

The purchasing function is usually performed most economically and efficiently by a specialised,
centralised purchasing department, directed by a skilled purchasing manager.

However, the purchasing function does not have to be performed in such a manner. In theory, it
can be performed, and in practice, it sometimes is performed by any number of different
company officers or departments.

The functions of purchasing department are varied and wide which are based upon different
approaches. The purchasing activities may be divided into those that are always assigned to the
purchasing department and those that are sometimes assigned to some other department. The
followings are some of the important functions which are necessary to be performed.

1. Receiving indents

2. Assessment of demand or description of need

3. Selection of sources of supply

4. Receiving of quotation
5. Placing order

6. Making delivery at the proper time by following up the orders.

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7. Verification of invoices

8. Inspection of incoming materials

9. Meeting transport requirements of incoming and outgoing materials

10. Maintaining purchasing records and files

11. Reporting to top management

12. Developing coordination among other departments

13. Creating goodwill of the organisation in the eyes of the suppliers.

1. Receiving indents:
The first and foremost function of purchasing is receiving demand/requisition of material from
different departments of the organisation, such as from production, stores, maintenance,
administrative, drawing office, planning, tool room, packing, painting, heat treatment etc.

After receiving the indent from users’ departments it examines in details and takes action
according to the need and urgency of any item. This is called ‘recognition of need’. Sometimes,
needs can be met by transfer of a stock of one department to another department. In other
cases, the reserve stock or the stocks kept in bank can be utilized i.e., pledged stock with bank.

2. Assessment of demand or description of need:

After recognising the need with appropriate description, i.e., qualitative as well as quantitative, is
necessary for the sound and successful purchasing. An improperly described demand can cost
heavily money-wise as well as time-wise.

The real problem arises when the order is placed for want of preciseness in the description of
goods needed, the items are received and these are not acceptable to the user department and it
also becomes difficult to convince the suppliers to return the goods in case of faulty supplies.
Therefore, purchasing department must have adequate knowledge of items being purchased to
be able to secure full description.

The purchasing department should not have such alternative purchases of commodities, which
are not available easily, on their own responsibility or at a lower cost unless and until it gets the
consent from the user department.
In a nutshell, it is recommended that the description of items for purchase on the part of indenter,
purchaser and seller should be quite clear and without ambiguity to promote harmony in an
organisation.

3. Selection of sources of supply:

Most important function of a purchasing department or officer is the selection of the sources for
the requisitioned items of stores. There are different sources of supply which have no similarity
between them.

For majority of items, selection of one of the vendors should be made. While selecting the item,
the purchase officer has to see whether the item to be purchased is on a regular basis i.e., it is
being purchased time and again or it is a seldom purchase on non-recurring basis.

Whenever the items are to be bought from single manufacturer, such as branded or patented
item, there is no difficulty in the selection of the sources of supply; the order can be placed with
the party according to terms and conditions of their sale.

Selection of source of supply requires the services of shrewd purchasing officer who can keep
pace with policies of the organisation and market from where the materials have to be purchased.

4. Receiving of quotation:
As soon as the purchase requisition is received in the purchase division, sources of supply will be
located; a decision is then taken in respect of the method of tendering/limitation of quotations
from prospective suppliers.

Prices are also ascertained by preparing a comparative statement with the help of either of the
following documents supplied either by the supplier or taken from the previous records of
advertisements, like:

(a) Catalogues, price lists etc.

(b) Telephonic quotations.

(c) Previous purchase records.

(d) Quotation letter or tender i.e., letter of inquiry.

(e) Sample and related price cards.

(f) Negotiation between suppliers and the purchase department like catalogue, price lists etc.

It is in the interest of purchasing department to keep this information up to date. Even for the
items which are being purchased on a regular basis, the purchasing section should invite tenders
and know full well the market price. It will ensure that prices being paid to the existing vendor are
competitive.
5. Placing order:
Placing a purchase order is the next function of purchasing officer. Since purchase order is a
legal binding between the two parties, it should always be accurate, clear and acceptable to both.
The purchase order should contain the following particulars:

(a) Description and specifications of the material.

(b) Quantity order.

(c) Transport and packing charges and shipping instructions.

(d) Name and address of the supplier.

(e) Date, time and place of delivery.

(f) Price, discount and terms of payment.

(g) Signature of the purchase manager.

(h) The name and address of the buyer.

6. Making delivery at the proper time by following up the orders:

Since one of the objectives of successful purchasing is delivery of goods at right time so as to
ensure delivery when and where needed? In normal practice, the responsibility of the purchasing
department is upto the time the material is received in the stores and is approved by the
inspection department.

Every purchasing department has the responsibility for follow-up of the orders it places on
different suppliers. All items do not require extensive follow-up. For some less important and low
value items follow-up would be costly and wastage of money and time only.

7. Verification of invoices:
In normal course, it is also the responsibility of purchase department to check the invoices and
accordingly advise the accounts department for clearing the payment to the parties concerned.
Contradictory statements have been given as to who should be assigned this function.

Some are of the view that invoices should be checked by the purchase department placed by it
whereas other suggests that it should go to the accounting department. In support of this, the
experts add that it is part of the responsibility of purchase department that orders are accurately
executed and properly filled as per terms and conditions of the contract.

If there is any error in the bills, the purchase department can get the correction done or
adjustment effected. If the invoices are checked by the stores or accounts departments, there
may be some delay in attending to the errors.
8. Inspection of incoming materials:
The purchasing department should have a close contact with inspection department. On receipt
of the materials from different suppliers, they are to be inspected as per specifications indicated
in the purchase order to verify their quality and quantity.

Uninspected materials are a burden on the economy of the organisation. If inspection is delayed,
the payments of the suppliers also are likely to be delayed, resulting in bad relations between
suppliers and purchasers.

9. Meeting transport requirements of incoming and outgoing materials:

The purchasing officer must make goods/materials available at the right time they are required, at
the place they are needed, and at the lowest possible cost. It is a big responsibility, and even a
slight error amounts to delay in consignment required at a particular time.

In this regard, the purchase department should have a thorough knowledge of the means of
transportation. It should make a correct choice of carriers or routes because otherwise it may
entail delay and additional transportation costs.

10. Maintaining purchasing records and files:

Purchasing involves a lot of paper work. Daily a number of letters, bills, quotations, notes,
challans, railway receipts, parcel, way bills, bills of ladings, goods received notes, lorry receipt,
goods receipt (transport delivery notes), inspection notes have to be dealt with. It involves a lot of
clerical work.

This department has to refer to previous correspondence on purchase orders, notes, catalogues,
blue prints, price lists etc. very frequently which makes it imperative to maintain records in
appropriate manner. These records are essential for making the day to day purchase.

11. Reporting to top management:

It is also an important function of the purchasing department to prepare weekly, monthly,
quarterly, bi-annually and yearly reports regarding expenditures of this department and send the
same to top management along with details of purchases made and suggestions or
improvements, if any.

12. Developing coordination among departments:

A purchasing department has to fulfill the needs of other departments in the organisation. It is the
function of purchasing department to work in close coordination and cooperation with other
departments of the company.

To a considerable extent, the attitude and reactions of other departments towards purchasing
department extends to these other departments. Mutual trust and cooperation is essential
between the purchasing department and other departments to secure high degree of efficiency.
13. Creating goodwill of the organisation in the eyes of the suppliers:
Good vendor relationship has to be maintained and developed to reflect enterprise’s image and
goodwill. Maintaining such relations requires mutual trust and confidence which grows out of
dealings between the two parties over a period of time. Worth of a purchasing department can be
measured by the amount of goodwill it has with its vendors.

Factors to consider when deciding between

single vendor vs. multi-vendor

1.Best-of-breed

The name is pretty explanatory, but just in case: A best-of-breed product is acknowledged (by
the genuinely knowledgeable) as the best product of its type. Importantly, this more often than
not refers to a specific module or product that focuses on one specific feature. The simple fact of
the matter is, it’s hard to be the best at everything. An integrated solution might be fantastic
overall, but not every component module is going to be best-of-breed. That’s why many
businesses cobble together solutions that take individual components from separate vendors.
With particular regard to vendor types:

 Single vendor – it’s very unlikely to get best-of-breed functionality for every feature with a
single vendor. With careful selection, you should be able to find a single vendor will likely be the
best in one-to-several areas. Make sure you do your homework if you take this option!
 Multi-vendor – this is basically the key advantage of choosing a multi-vendor solution.

2.Complexity

Here, I’m referring to the complexity inherent in integrating and implementing solutions for your
business. Although there’s definitely a trend toward making everything compatible, there are still
a great many legacy systems out there that weren’t built using common underlying software
architectures or principles.

 Single vendor – should have the advantage – the single vendor only has to worry about
integrating its own product with your pre-existing systems. That can be challenging, but it’s at
least a closed set of details to fuss over.
 Multi-vendor – the onus here is on you to integrate everything. With multiple systems and
a wide tranche of details, very few outside vendors will be able to integrate everything into a
single cohesive whole – at least, not without great cost. And speaking of which…

3.Cost

There’s no getting around it – pricing is going to be different across the two categories.

 Single vendor – typically, this will be lower in price, thanks to better volume discounts.
 Multi-vendor – price will be higher because you’ll be forced to buy separate individual
modules to constitute your solution.

4.Implementation difficulty
This is reference to the challenges that you’ll likely encounter for installing and setting up
whichever system you ultimately purchase.

 Single vendor – it will be generally be less challenging to install single-vendor solutions

because it’s only one set of programs/protocols to integrate into your existing systems.
 Multi-vendor – multi-vendor solutions typically will require more effort to put into place
because you’ll have to coordinate the integration of disparate (and potentially incompatible)
systems.

5.Procurement effort

Systems don’t just purchase themselves, right? The question is, how hard will it be to get them?
The answers are pretty straightforward, however!

 Single vendor – (relatively) simple – you’re only dealing with one vendor, after all!
 Multi-vendor – more effortful – you have a lot of different vendors with whom to negotiate
contracts, and not every contract is going to run the same length and/or will be renewed at the
same time, if at all!

6.Product upgrades

We live in an age of ultra-rapid product updates and upgrades. What can we expect from our
vendor packages?

 Single vendor – you’ll probably see major updates to single vendor solutions much more
infrequently. The updates/upgrades will likely be much more comprehensive!
 Multi-vendor – because you’re using and seeing smaller packages from each vendor, you
should be getting upgrades more often. That could cause some problems with integration,
however.

7.Staff training

The thing with software (and business IT in general, really), is that you do need training to take
maximum advantage of your solution. That is true of most things, of course, but with technology,
it seems especially true! The question here then, is just how much support you’re going to get in
this domain (and how much you’re likely to get).

 Single vendor – you and your staff will likely need less training overall, but you’ll likely get
more training sessions from the vendor
 Multi-vendor – you and your staff will likely need more training overall, but you’ll likely get
less training since your purchase will represent a smaller order for the vendor.

8.Vendor survival

Well, this is pretty important. You want your vendor to supply you with product(s), upgrades, and
service/support for years to come, right?

 Single vendor – if it’s a big single vendor (especially if it’s an established one), it’ll likely
stay in business for the long-haul.
 Multi-vendor – here’s where things can get tricky. On the one hand, smaller companies
might be best-in-breed in particular areas, but because of their size, they might not get volumes
of business necessary to stay afloat. Alternately, they may just reach a level of success where
the bigger players will buy them out. After which, there’s no guarantee that the product will stick
around…

STORES MANAGEMENT

Stores Management
Store is an important component of material management since it is a place that keeps the
materials in a way by which the materials are well accounted for, are maintained safe, and are
available at the time of requirement. Storage is an essential and most vital part of the economic
cycle and store management is a specialized function, which can contribute significantly to the
overall efficiency and effectiveness of the materials function. Literally store refers to the place
where materials are kept under custody.
Typically a store has a few processes and a space for storage. The main processes (Fig 1) of
store are (i) to receive the incoming materials (receiving), (ii) to keep the materials as long as
they are required for use (keeping in custody), and (iii) to move them out of store for use
(issuing). The auxiliary process of store is the stock control also known as inventory control. In a
manufacturing organization, this process of receiving, keeping in custody, and issuing forms a
cyclic process which runs on a continuous basis. The organizational set up of the store depends
upon the requirements of the organization and is to be tailor made to meet the specific needs of
the organization.

Fig 1 Main processes of a store

Store is to follow certain activities which are managed through use of various resources. Store
management is concerned with ensuring that all the activities involved in storekeeping and stock
control are carried out efficiently and economically by the store personnel. In many cases this
also encompasses the recruitment, selection, induction and the training of store personnel, and
much more.
The basic responsibilities of store are to act as custodian and controlling agent for the materials
to be stored, and to provide service to users of these materials. Proper management of store
systems provide flexibility to absorb the shock variation in demand, and enable purchasing to
plan ahead.
Since the materials have a cost , the organization is to manage the materials in store in such a
way so that the total cost of maintaining materials remains optimum.
Store needs a secured space for storage. It needs a proper layout along with handling and
material movement facilities such as cranes, forklifts etc, for safe and systematic handling as well
as stocking of the materials in the store with an easy traceability and access. It is to maintain all
documents of materials that are able to trace an item , show all its details and preserve it up to its
shelf life in the manner prescribed or till it is issued for use. Store is to preserve the stored
materials and carry out their conservation as needed to prevent deterioration in their qualities.
Also store is to ensure the safety of all items and materials whilst in the store which means
protecting them from pilferage, theft, damage, deterioration, and fire.
The task of storekeeping relates to safe custody and preservation of the materials stocked, to
their receipts, issue and accounting. The objective is to efficiently and economically provide the
right materials at the time when it is required and in the condition in which it is required. The basic
job of the store is to receive the materials and act as a caretaker of the materials and issue them
as and when they are needed for the activity of the organization.
Once the material has been received and cleared through inspection and accepted for use, it
needs safe custody of the stores. The role of custody is to receive and preserve the material. A
stage comes when the material is needed for use. Store at that time releases the material from its
custody to the user department and the process is called ‘issue of goods. It might also happen
that after partial use , some materials having useable value in future are returned to the store and
thus they also become part of the custody again.
Storekeeping activity does not add any value to the materials. In fact it adds only to the cost. The
organization is to spend money on space (expenditure on land, building passage and roads),
machinery (store equipment), facilities (e.g. water, electricity, communication etc.), personnel,
insurance, maintenance of store equipment, stationary etc. All of these get added to the
organizational overheads and finally get reflected in the costing of the finished product. However,
it is an essential function in any organization.
Objectives of store management
An efficient stores management has normally the following main objectives.
 To ensure uninterrupted supply of materials without delay to various users of the
organization.
 To prevent overstocking and under stocking of the materials
 To ensure safe handling of materials and prevent their damage.
 To protect materials from pilferage, theft, fire and other risks
 To minimize the cost of storage
 To ensure proper and continuous control over the materials.
 To ensure most effective utilization of available storage space
 To optimize the efficiency of the personnel engaged in the store
Classification of stores
Store can be of temporary nature which means that it has a limited life. Store can also be of
permanent nature. Stores are classified basically in the following broad categories.
 Functional stores – Functional stores are named based on the function of the materials
stored. Examples are fuels store, chemicals store, tools store, raw materials store, spare parts
store, equipment store, refractories store, electric store, explosives store, and finished goods
store etc.
 Physical stores – Physically stores can be centralized stores or decentralized stores.
These stores are named based on the size and location of the store. Examples are central store,
sub store, department store, site store, transit stores, receipt store, intermediate store, open yard
store, and covered store etc.
 Stores are also classified by naming them after the departments to which they serve.
Examples are construction stores, operation stores, rolling mill stores, blast furnace stores, and
steel melting shop stores etc.
 Stores are sometimes classified based on the nature of materials stored in them.
Examples are general store, bonded store, perishable store, inflammable store, salvage store,
reject store, and quarantine store etc.
Centralized storage of materials in a central store has advantages as well as certain
disadvantages. The following are the advantages.
 Centralized store can cater to a wider range of materials which is not possible in a smaller
store. Hence user department is to look for the material of its need only at one place.
 It contributes to the inventory control in the entire organization since the requirement of all
the departments gets clubbed up.
 It makes better control feasible.
 It provides economy in storage space as materials when stored in larger quantities,
occupy less specific space.
 Large stores can be provided with better and modern handling facilities. The operation can
also be automated.
 Delivery at a single point decreases cost of delivery.
 Receipt and inspection of the materials can be organized more efficiently.
 Improved opportunities are available for the standardization of inventory.
 The turnover of materials is increased because of the maintenance of lower inventory and
the probability of deterioration of materials during storage is correspondingly decreased.
 Manpower requirement for managing of stores get reduced. Also the duplication of records
which takes place in decentralized store system is avoided.
The disadvantages of a centralized store is as follows.
Distance from the store and the user department gets increased which requires higher
transportation needs from the store to the user department.
 If there are slippages or system not being well organized then there can be shortages of
the materials which may results into unnecessary interruptions in production.
 There may be necessity of additional internal documentation in the store.
 The risks due to the fire and thefts are higher since the entire stock of the materials are
concentrated at one place.
 The variety of materials to be stored can be large and it can create complications in the
systematic storage as well as in storage procedures.
Functions of a store
Store personnel are responsible for carrying out the following functions.
 Receipt of incoming materials
 Supervision of unloading of materials and tallying of materials
 Checking for damages or shortages and preparation of the report
 Filling of ‘goods inward’, ‘day book’, or ‘daily collection’ register
 Completion of vendors consignment note (challan)
 Making arrangement for inspection and getting the inspection completed
 Preparation of ‘goods receipt note’ (GRN)
 Preparation of ‘goods rejection memo’ (in case of rejection of materials)
 Sending of materials to the respective stores
 Sending of the relevant documents to the respective departments
 Ensuring all storage and material handling facilities are in proper working order
 Ensuring good housekeeping and cleanliness in the storage space
 Checking, counting and tallying of materials before issue
 Making prompt entries in ‘Bin card’ or stock card
 Ensuring correct documentation of material receipts and material issues
 Ensuring safe and proper handling of materials so as not to damage them
 Ensuring proper record keeping and correct accounting of materials
 Ensuring regular stock verification
 Ensuring that rules and regulations relating to physical custody and preservation of
materials are followed
 Ensuring safety of materials and personnel

What is Accounting for materials? Types of Accounting

materials and Purchase of materials
Accounting for materials
What is Accounting for materials? Types of Accounting materials and
Purchase of materials?

What is Accounting for materials?

Introduction
The term material simply includes raw material, components, tools spare parts and consumable
stators. Material which forms a part of a finished product is the firs

t and most important element of cost. Materials constitute such a significant part of product cost
and since this cost is controllable, proper planning, purchasing, purchasing, handling and
accounting are of great importance. In other words, proper control of materials is necessary form
time order for purchase of materials are placed with suppliers units they have been consumed.
Concept and meaning of materials
The term 'materials' is generally, used in manufacturing concerns. Materials are the commodities
or articles used for processing in the factory to manufacture goods or rendering serves. It
includes physical commodities used to manufacture the final product. It is the first and most
important element of cost.

Materials form a high portion of the total cost of reduction. In certain cases, like sugar, matters
may form as high as 60 percent of total cost. The production is rarely less than 25 to 30 percent
is case of most products. This means that efficiency as regards materials is a vital factor in total
cost of production and products earned. Any saving in materials will be directly reflected in profit.
Therefore, it is necessary that minimum care should be devoted to the purchase, storing and use
of materials. Raw materials, diesel, tools etc. are the example of materials.

Types of materials
Normally, there are two types of materials in manufacturing concern. They are as follows:
Direct materials
Direct materials: means the materials which form part of finished output and can be identified
with the finished product easily. For example; wood, plywood, adhesive, wood polish, nails etc.
in case of manufacturing furniture, cost of cotton in case of manufacturing cotton yarn, cost of
yarn in case of manufacturing cloth, cost of iron in case of manufacturing machinery etc. the
main feature of direct materials is that these enter into and form part of the finished product.
Indirect materials
Indirect material: refers to the materials costs, which cannot be allocated but can be apportioned
to or absorbed by cost centers or cost units. These are the materials, which cannot be traced as
part of the product, and their cost is distributed among the various cost centers or cost units on
some equitable basis.
Examples of indirect materials are coal and fuel for generating power, cotton waste, lubricating
oil and grease used in maintaining the machinery, materials consumed for repair and
maintenance work, dusters and brooms used for cleaning the factory, etc.

Meaning of material control

No system of costing can be said to be complete without a proper system of material control.
Material control is a system which ensures that right quality of material is available in the right
quantity at the right time and right place with the right amount of investment. Materials control
basically aims at efficient purchasing of materials, their efficient storing and efficient use. In
materials so as to have the minimum cost of materials. Materials control consists of controls at
two level; quantity controls and cost controls.
Need/ objectives for material control
Materials controls are needed for the following reasons:
1. To avail materials continuously: there should be a continuous availability of all types of
materials in the factory. So, there should be a proper control on material to run the production
smoothly.
2. To prevent the excessive investment in material: materials control aims at preventing
over investment in material. This is done by proper stocking of material i.e. removing the over
stocking.
3. To purchase the qualitative materials at reasonable price: another objective of material
control is to ensure that the qualitative materials are purchased. Similarly, the purchase should
be at reasonable prices this can be achieved through trade discount, terms of credit, carrying
system etc.
4. To prevent the wastage and misappropriation the materials: the loss or damage of
materials should be stored as low as possible in the god own. Storekeeper should be trained to
handle the materials in a scientific way to avoid the waste and misappropriation. Leakage must
be avoided to control the cost of production.
5. to provide information about availability of materials: the success of production
process largely depends on the availability of materials. Hence, it is necessary to identify the
source of materials supply. For this, the information about the suppliers is vital.

Essential of material control

Material control is essential because of following reasons:
1. Proper co-ordination among the departments: there must be a proper cooperation and
coordination among the department involved in purchasing, receiving and stoning so that there
will be proper availability of materials for smooth production.
2. Authorized purchase: the purchase of materials should be made by authorized personnel or
department. A centralized purchase system is suitable for this.
3. Perpetual inventory system: it is possible to determine the quantity and value of each
type or material in stock with perpetual system is suitable for this.
4. Internal check system: the organization should be introduced internal check system to
ensure that all transaction involving materials are checked by authorized person.
5. Uses of standard forms: standard forms for orders, issue, transfer of materials from one
job to the other, transfer of material from the job to the stores etc. are used.
6. Proper classification and codification of materials: it is necessary to classify and codify
the materials to handle and store the materials properly. it also helps to maintain secrecy on
material.
7. Fixation of proper stock level: there are different types of stock level such as; maximum
stock, minimum stock, average stock etc. the main objective of fixing the stock level are to
remove the unnecessary investment in materials and run the production smoothly.

UNIT-3
Inventory Management
In any business or organization, all functions are interlinked and connected to each other and are often overlapping. Some
key aspects like supply chain management, logistics and inventory form the backbone of the business delivery function.
Therefore these functions are extremely important to marketing managers as well as finance controllers.

Inventory management is a very important function that determines the health of the supply chain as well as the
impacts the financial health of the balance sheet. Every organization constantly strives to maintain optimum inventory
to be able to meet its requirements and avoid over or under inventory that can impact the financial figures.

Inventory is always dynamic. Inventory management requires constant and careful evaluation of external and internal
factors and control through planning and review. Most of the organizations have a separate department or job function
called inventory planners who continuously monitor, control and review inventory and interface with production,
procurement and finance departments.

Defining Inventory
Inventory is an idle stock of physical goods that contain economic value, and are held in various forms by an organization
in its custody awaiting packing, processing, transformation, use or sale in a future point of time.

Any organization which is into production, trading, sale and service of a product will necessarily hold stock of various
physical resources to aid in future consumption and sale. While inventory is a necessary evil of any such business, it may
be noted that the organizations hold inventories for various reasons, which include speculative purposes, functional
purposes, physical necessities etc.

From the above definition the following points stand out with reference to inventory:

 All organizations engaged in production or sale of products hold inventory in one form or other.
 Inventory can be in complete state or incomplete state.
 Inventory is held to facilitate future consumption, sale or further processing/value addition.
 All inventoried resources have economic value and can be considered as assets of the organization.

Different Types of Inventory

Inventory of materials occurs at various stages and departments of an organization. A manufacturing organization holds
inventory of raw materials and consumables required for production. It also holds inventory of semi-finished goods at
various stages in the plant with various departments. Finished goods inventory is held at plant, FG Stores, distribution
centers etc. Further both raw materials and finished goods those that are in transit at various locations also form a part of
inventory depending upon who owns the inventory at the particular juncture. Finished goods inventory is held by the
organization at various stocking points or with dealers and stockiest until it reaches the market and end customers.

Besides Raw materials and finished goods, organizations also hold inventories of spare parts to service the products.
Defective products, defective parts and scrap also forms a part of inventory as long as these items are inventoried in the
books of the company and have economic value.

Types of Inventory by Function

INPUT PROCESS OUTPUT

Raw Materials Work In Process Finished Goods

Consumables required for Semi Finished Production in Finished Goods at Distribution

processing. Eg : Fuel, various stages, lying with Centers through out Supply
Stationary, Bolts & Nuts etc. various departments like Chain
required in manufacturing Production, WIP Stores, QC,
Final Assembly, Paint Shop,
Packing, Outbound Store etc.
Maintenance Production Waste and Scrap Finished Goods in transit
Items/Consumables

Packing Materials Rejections and Defectives Finished Goods with Stockiest

and Dealers

Local purchased Items Spare Parts Stocks & Bought

required for production Out items

Defectives, Rejects and Sales

Returns

Repaired Stock and Parts

Sales Promotion & Sample

Stocks

TYPES OF INVENTORY COST

must be viewed as a positive contributor to corporate profitability. To that end, management
must determine when various items should be ordered, how much to order each time, and how
often to order to meet customer needs while minimizing associated costs.

There are three types of costs that must be considered in setting inventory levels:

1. Holding\Carrying cost:

They are expenses such as storage, handling, insurance, taxes, obsolescence, theft, and interest
on funds financing the goods. These charges increase as inventory levels rise. To minimize
carrying costs, management makes frequent orders of small quantities. Holding costs are
commonly assessed as a percentage of unit value, rather than attempting to derive monetary
value for each of these costs individually. This practice is a reflection of the difficulty inherent in
deriving a specific per unit cost, for example, obsolescence or theft.

2. Ordering costs:

Ordering costs are those fees associated with placing an order, including expenses related to
personnel in purchasing department, communications, and the handling of related paper work.
Lowering these costs would be accomplished by placing small number of orders, each for a large
quantity. Unlike carrying costs, ordering expenses are generally expressed as a monetary value
per order.

3. Stock-out costs:

They include sales that are lost, both short and long term, when a desired item is not available;
the costs associated with back ordering the missing item; or expenses related to stopping the
production line because a component part has not arrived. These charges are probably the most
difficult to compute, but arguably the most important because they represent the costs incurred
by customers when an inventory policy falters. Failing to understand these expenses can lead
management to maintain higher inventory levels than customer requirements may justify
THE SCOOP ON LEAN INVENTORY MANAGEMENT
TECHNIQUES
.What is Lean Inventory Management?
“Lean” refers to a systematic approach to enhancing value in a company’s inventory by identifying and eliminating waste
of materials, effort and time through continuous improvement in pursuit of perfection.
Lean management movement is credited to Henry Ford, who in the 1920s applied the concept of “continuous flow” in the
assembly-line process. Over the years, the concept has been modified and applied to nearly all industries.
Lean inventory management techniques are built upon five principles:
i) Value: Define the value that your company will get from lean inventory management.
ii) Flow: Understand how inventory flows in your warehouse and clear any obstacles that do not add up.
iii) Pull: Move inventory only when requested by customer.
iv) Responsiveness: Being able to adapt to change.
v) Perfection: Continuously refine your inventory management processes to improve quality, cycle time, efficiency and
cost.
In the 1980s, the concepts of Total Quality Managements (TQM) and Six Sigma that were advocated for by W. E. Deming
and Bill Smith respectively were reintroduced to US businesses.
Lean inventory management uses the concepts of TQM and Six Sigma to eliminate. The result is usually reduction
of costs and improvement in quality. When used together with a customer first policy, the result is usually a satisfied
customer.
Lean management is a combination of a set of tools, philosophy and a system.
As a tool, companies can use the principles to select the right technique or methods to improve what needs improving.
As a philosophy, lean management emphasizes minimization or elimination of excesses on all resources used in various
operations of the enterprise.
As a system, companies can use lean management to lower their costs, and improve customer satisfaction.
The success on any lean inventory management depends on how a company best implements the principles to achieve its
needs. The greatest benefit of the principles comes in identify its key attributes and applying them across functional
boundaries.

Attributes of Lean Inventory Management

Building and maintaining a lean inventory management revolves around six main attributes: These are:
Demand management: Providing inventory when requested by the customer. For effective demand management,
companies need to plan their sales and operations, check the inventory management practices, demand signal and demand
collaboration.
Costs and waste reduction: While lean inventory management may appear to focus on reducing waste and cost, this
should only be the case to the extent that it does not have a negative impact on customer value.
Process standardization: This enables continuous inventory flow in the company. Some inhibitors like transportation,
batch processes and work in queue can slow down inventory delivery.
Industry standardization: Process and product standardization among tradition partners can still lead to waste, especially
when common components are not optimally standardized. While standardization may enhance service delivery and
benefit customer using the products, it also decreases the proprietary nature of a product, making other competitive factors
more important.
Cultural change: Inventory partners, from suppliers to customers, must work as a team to provide value to the end user.
Cross-enterprise collaboration: Cross enterprise collaboration through use of teams can help in defining value and
understanding the value stream to maximize the added value delivered to the customers.
The benefits of adopting lean inventory management practices are clear: reduced SKU counts and inventory levels,
increased use of standards in processes and materials, improved collaborations and a general reduction in cost of goods
sold when compared to companies that do not use lean principles. A lean supply chain and inventory management
contributes to the bottom line.

Just in Time (JIT) Production

What is Just in Time?
Just in Time (JIT), as the name suggests, is a management philosophy that calls for the
production of what the customer wants, when they want it, in the quantities requested, where
they want it, without it being delayed in inventory.
So instead of building large stocks of what you think the customer might want you only make
exactly what the customer actually asks for when they ask for it. This allows you to concentrate
your resources on only fulfilling what you are going to be paid for rather than building for stock.
Within a Just in Time manufacturing system, each process will only produce what the next
process in sequence is calling for.

The Origins and History of JIT

JIT is generally accepted as being a concept invented by Taiichi Ohno of Toyota; after World
War2 resources were very scarce in Japan so using them to create something that the
customer did not actually want right now was not a good idea.
On a visit to the US the management team of Toyota were inspired by, of all things, how they
saw a supermarket (Piggly Wiggly) handle their inventory. Only what was removed from the
shelves by the customers was actually replenished and ordered from suppliers. In this way
shelves never became empty, nor did they end up overflowing with excessive inventory.
Taiichi Ohno was tasked by Eiji Toyoda to make production more efficient through
implementing these ideas and pull production with just in time concepts was developed. It
took more than 15 years for Toyota to perfect their ideas and it was not introduced into
western manufacturing until the end of the 1970’s.
With a JIT system each process pulls from the preceding process’ “supermarket” and that
process will then work to replenish those shelves.

How does JIT differ from traditional manufacturing?

In traditional manufacturing we try to predict what the customer will want and we will create a forecast
(or guess) against which we will produce our products. We will also try to produce those products in
large batches as the belief is that will make machines and processes more efficient, especially if
those machines require a long time to setup. This will typically result in long lead times through our
processes, huge amounts of Work In Process (WIP) stocks and also large quantities of finished
goods stocks that have not yet been ordered by our customers. This is what many now call “Just in
Case” manufacturing.
If the customer does order something that is not in our current stocks they will either have to wait
many weeks or even months for the product to be manufactured or work will be hurried through the
system by progress chasers causing a huge amount of disruption to the production schedule.
These systems are often run by Manufacturing Resource Planning (MRP2) programs that will try to
schedule each and every process within the facility. These software packages will seek to control
every step and everything requires careful and often complex planning.
A Just in Time system on the other hand will seek to use simple visual tools known as Kanbans to
pull production through the processes according to what the customer actually takes. It massively
reduces the amount of stock held and will reduce lead times by a significant amount, often from
weeks to just a few hours or days.

The benefits of a JIT system

The following are some of the many benefits that you could gain through the implementation
of just in time:

1. Reduction in the order to payment timeline; cash, as they say is king in business.
Many businesses will suffer with cash flow problems as they will often have to purchase large
amounts of raw materials prior to manufacturing and subsequent payment by the customer.
Often this gap is many months. Through implementing JIT you are able to considerably
reduce that time period.
2. Reduction in Inventory costs; one of the main aims with any JIT implementation is to
improve stock turns and the amount of stock being held. Personal experience has seen
reductions of more than 90% stock in some industries. Along with the reduction in the stock
come many other associated benefits.
3. Reduction in space required; by removing large amounts of stock from the system
and moving processes closer together we will often see a significant reduction in the amount
of floor space being used. Results from 100’s of projects run within companies in the UK
through the Manufacturing Advisory Service saw average reductions of 33% for simple 5 day
implementation projects.
4. Reduction in handling equipment and other costs; if you don’t have to move large
batches there is less need for complex machinery to move them and all of the associated
labor and training.
5. Lead time reductions; one of the most significantly impacted areas is that of the time
it takes for products to flow through the process. Instead of weeks or months most JIT
implementations result in lead times of hours or a few days.
6. Reduced planning complexity; the use of simple pull systems such as Kanban, even
with your suppliers, can significantly reduce the need for any form of complex planning. With
many implementations the only planning is the final shipping process.
7. Improved Quality; the removal of large batch manufacturing and reduction in handling
often results in significant quality improvements; often in the region of 25% or more.
8. Productivity increases; to achieve JIT there are many hurdles that must be overcome
with regards to how the process will flow. These will often result in productivity improvements
of 25% upwards.
9. Problems are highlighted quicker; often this is cited as being a negative aspect of
JIT in that any problems will often have an immediate impact on your whole production
process. However this is the perfect way to ensure that problems are highlighted and solved
immediately when they occur.
10. Employee empowerment; one requirement of JIT as with most other aspects of Lean
manufacturing is that employees are heavily involved in the design and application of your
system.

Requirements for implementing Just in Time

Just in Time is just one of the pillars of a lean manufacturing system and as such it cannot be
implemented in isolation and without a firm foundation on which to build. Trying to reduce batch
sizes without tackling setup times for instance cannot be done. The following are some of the
things that must be implemented for JIT to be able to work:

 Reliable Equipment and Machines; if your machinery is always breaking down or giving
you quality problems then it will frequently manifest in big issues with any JIT flow. The
implementation of Total Productive Maintenance is required to ensure that you can rely on your
equipment and to minimize the impact that any failures have on your processes.
 Well designed work cells; poor layout, unclear flow, and a host of other issues can all be
cleared up by the implementation of 5S within your production. This simple and very easy to
implement lean tool will make a significant improvement in your efficiencies all by itself.
 Quality Improvements; an empowered workforce that is tasked with tackling their own
quality problems with all of the support that they need is another vital part of any lean and JIT
implementation. Setting up kaizen or quality improvement teams and using quality tools to
identify and solve problems is vital.
 Standardized Operations; only if you know how each operation is going to be performed
can you be sure what the reliable outcome will be. Defining standard ways of working for all
operations will help to ensure that your processes are reliable and predictable.
 Pull Production; Just in time does not push raw materials in at the front end to create
inventory (push production), it seeks to pull production through the process according to
customer demand. It achieves this by setting up “supermarkets” between different processes
from which products are taken or by the use of Kanbans which are signals (flags) to tell the
previous process what needs to be made.
 Single piece Flow; the ideal situation is one in which you will produce a single product as
ordered by the customer. This for some industries is not immediately possible but should always
be your end goal. To achieve this you will need to work on reducing batch sizes significantly
through the use of Single Minute Exchange of Die (SMED) which seeks to significantly reduce
the time taken for any setup. It will also often require the use of smaller dedicated machines and
processes rather than all singing all dancing mega machines.
 Flow at the beat of the customer; the demand of your customer is often referred to as
your Takt time. You need to ensure that your cells and processes are organized, balanced and
planned to achieve the pull of the customer. This is achieved through Heijunker and Yamazumi
charts.

Production Planning and Inventory Control

Production Planning

Production planning, or production scheduling, is a term provides planning of

production in all aspects, from workforce activities to product delivery. Production
planning is almost exclusively seen in manufacturing environments;
however Production planning is primarily concerned with the efficient and
effective use of resources it may be used in service oriented organization.
Production planning sometimes refers to as operation planning, the main characteristic
is that production planning is focused on the actual production, whereas operations
planning looks at the operation as a whole.

Objective of production planning

Minimize Production Time:

A main goal of production planning is to ensure that production processes are to be

completed with in the schedule, as a means determine the most efficient start and end
times for each production activity. Additional capacity must utilize as required in
accordance with the past experience

Minimize Production costs:

Supply Chain Scheduling (SCS) is another component of production planning

Systems. It synchronizes to reduce materials costs. Apply appropriate manufacturing
method as required upon the nature of the materials. The principles of lean
manufacturing are very popular, and rely heavily on Just-in-Time inventory methods
that in turn rely heavily on interaction with suppliers and transparency throughout the
supply chain.

Use Resources Efficiently:

Ensure that each production department has exactly the right materials at the right
time. the principles of Supply Chain Scheduling mentioned that there are always
enough raw materials for production processes, Capacity Requirements Planning
ensures that there is never too much raw materials inventory on hand, and reduces
costs associated with the misallocation of resources.

Customer Satisfaction:

The prime objective of Production planning is to ensure a customer satisfaction. By

creating a cost efficient production system, organization will be able to minimize
defects, reduce prices, and quicken throughput, making more reliable products at
lower prices available more quickly to your customers.

PRODUCTION SCHEDULING

The production schedule is derived from the production plan; it is a plan that
authorized the operations function to produce a certain quantity of an item within a
specified time frame. The production schedule is drawn in the production planning
department

Production scheduling has three primary goals or objectives:

1. The first involves due dates and avoiding late completion of jobs;
2. The second goal involves throughput times;
3. The third goal concerns the utilization of work centers.

Production scheduling involves due dates and avoiding late completion of jobs. The
firm wants to minimize the time a job spends in the system, from the opening of a shop
order until it is closed or completed. It Concerns the utilization of work centers. Firms
usually want to fully utilize costly equipment and personnel.

Inventory Control

An inventory is a stock or store of goods. Keeping an optimal amount of raw materials

in stock is a crucial component of any production-oriented organization. Before a
product can be manufactured, the raw materials must be in stock and in good quality.
Inventory control is a crucial part of the production system. Essentially inventory
control is concerned with production planning. It determines inventory of a finished
product or inventory of materials used in making such products. Inventory control is
affected by changes in customer demand, holding costs, ordering costs and back
order costs. Improper inventory control hampers operations, diminish customer’s
satisfaction and increase cost of production.

The nature and importance of inventories controls

Inventories are a vital part of business. Not only are they necessary for operations, but
also they contribute to customer satisfaction. A typical manufacturing firms carries
different kinds of inventories, including the following:

1. Raw materials;
2. Partially finish goods (work in progress);
3. Finish goods;
4. Replacement parts;
5. Goods in transit to ware house or customers;

Function of inventory control

1. To meat anticipated customer demand;

2. To smooth production requirement;
3. To decouple operation
4. To protect against stock outs;
5. To take advantage of order cycles
6. To hedge against price increases
7. To permit operations

To meet anticipated customer demand:

The inventories refer to as anticipation of stock. The requirements of a customers lead

to maintain sufficient stocks which may possible by using efficient tools of inventory
control

To smooth production requirement:

Firms have experience seasonal demand often builds up by inventories during

preseason periods to meet overly high requirements during seasonal periods.

To decouple operation:

Historically, manufacturing firms have used inventories as buffers between successive

operations to maintain continuity of production. Firms have used buffer of raw
materials to insulate production in delivers from supplier. Companies have taken
closer look at buffer inventories.

To protect against stockouts

Delayed deliveries and unexpected demand increase the risk of shortages. Delays can
occur because of weather conditions, supplier’s stockouts, delivery of wrong materials,
quality problem and so on. The risk of shortage can be reduced by holding safety
stocks.

To take advantage of order cycles:

It is usually economical to produce in large rather than small quantities. To minimize

inventory costs a firm buys large quantities that exceed immediate requirements.

To hedge (be cautious) against price increases:

Occasionally, firms suspect that substantial price increase and purchase large
quantities. It depends on the ability of storage.

To permit operations:

The fact that production operations take a certain amount of time means that there will
generally be some work in progress or any other factors may lead to pipe line
inventories.

Objective of Inventory control

Inadequate control of inventories can result in both under and overstocking of items.
Understocking results lost sales and dissatisfied customers. Overstocking can be
increased holding cost as a result increase product price.

The overall objective of inventory management is to achieve satisfactory levels of

customers. Balance of stocking requires to satisfy the customers.

Requirements for effective inventory

Management has two basic function concerning inventory. To establish a system

keeping truck on items in inventory and make decision about how much and when to
order. To be effective management must have the following:

1. A system to keep track of the inventory on hand and on order;

2. A reliable forecast of demand ;
3. Knowledge of lead times and lead time variability;
4. Reasonable estimates of inventory holding costs, oredering costs, and shortage costs;
5. A classification system for inventory items

The management must take closer look at each of these requirements.

Operation management

Introduction to operations Management:

In the past manufacturing management, operation management was called production

management. Later the name was expanded production and operation management
or simply operation management.

Operations management is the management of system or process that creates goods/

services. Operation management is the part of the organization that is responsible for
producing goods and services. Operation management is involved to supply product
or service of the organization in connection with other functions like finance and
marketing.

Four major areas need to be considered for operations management:

1. Process: Physical process or facility used to produce the product like equipment,
technology and workforces. (main is capital)
2. Quality: Standard must be set, people trained and the product or service must be
inspected.
3. Capacity: size of the physical facilities.
4. Inventory (stock): What to order, how much to order, when to order, Inventory
control systems are used to materials from purchasing through raw materials, work in
process, and finish goods inventory.

As an operation manager requires to consider certain key issues:

What: What resources will be needed.

When: When resources needed, when work should be done, when ordered for raw
materials supply and corrective actions needed.

Where: Where will the work will be done

Who: who will done the work

Inputs, (energy, c Transformation (conversion system)

Capital, labour, materials)

Out put (goods and services)

All systems interact with internal and external environment.

Aggregate Planning

Production plan is essentially (basically) the out put of aggregate (collective or

combined) planning. Aggregate planning begins with the forecast of aggregate
demand for the intermediate range.

In the spectrum (range, Scale) of production planning aggregate planning

is intermediate range capacity planning that typically covers a time horizon of 2 to 12
months in some cases 18 months. It is particularly useful for that kind of organizations
have experience seasonal or other fluctuations in demand and capacity.

The goal of aggregate planning is to achieve a production plan that will effectively
utilize the organization’s resource to satisfy expected demand. Planner must make
decisions on output rates, employment levels and changes inventory levels and
changes, back order, and subcontracting in or out. Aggregate planners are concerned
with the quantity and the timing of expected demand.

Intermediate planning
Intermediate plans consider the function of intermediate decisions, General level of
employment, output, finished goods, inventories, subcontracting and back order.

Technique for aggregate planning

A general procedure for aggregate planning:

1. Determine demand for each period.

2. Determine capacity (Regular time, overtime, subcontracting) for each period.
3. Identify companies or departmental policies, that pertinent (maintain a safety stock 5
percent of demand, maintain a stable workforce)
4. Determine unit costs for regular time, overtime, subcontracting, holding inventories,
back orders, layout (draft) and other relevant const
5. Develop alternative plans and compute the cost for each.

Supply Chain Management

Supply chain management is the integral part of the operation management. It

includes suppliers, producers, and customers. Managing the supply chain requires all
managers to consider the entire flow of materials and information along the supply
chain (raw materials, production and distribution to final consumer).

Supply chain is a sequence of the organizations their facilities, functions and activities
that are involved in producing and delivering a product or service.

Facilities included: Warehouses, Factories, processing centre, distribution centers,

retailoutlets (passage or channel) and offices.

Functions and activities: Forecasting, purchasing, inventory management,

information management, quality assurance, Scheduling, production, distribution,
delivery and customer service.

The need for Supply chain Management

1. The need to improve operations

2. Increasing to improve outsourcing
3. Incresing transportation cost
4. Copetive pressure
5. Increasing globalization
6. Incresing importance of ecommerce
7. The complexity of supply
8. The need to manage inventory

The need to improve operations: The opportunity lies largely with the procurement,
distribution and logistics.

Increasing to improve outsourcing: Buying goods or services instead of producing or

providing them in house.

Increasing transportation cost: It is not avoidable

Competitive pressure: Competitive pressure leads to produce new product.The
complexity of supply chain: There are many inherent uncertainties that can adversely
affect the supply chain: inaccurate forecasting, late delivery, substandard quality,
cancel the order or change the order.

Benefits of Supply chain Management

1. Lower inventories
2. Lower cost
3. Higher productivity
4. Grater agility (quickness)
5. shorter lead time
6. Higher profit
7. Grater customer loyalty.

Element of Supply Chain

1. Customers: Determine what products customers want

1. Forecasting : Predicting the quantity and timing of customers demand
1. Design: Incorporating customers, wants, manufacturability and time to market.
1. Capacity Planning: Matching supply and demand
1. Processing: Controlling quality, scheduling work
1. Inventory: Meeting demand requirements while managing the costs of holding
inventory
1. Purchasing: Evaluating potential supplies, supporting the needs of operations on
purchased goods and services
2. Suppliers: Maintaining supply quality on time delivery and flexibility maintain supplier
relation.
1. Location: Determine the location of facilities
2. Logistics: Deciding how to best move information and materials.

Operation Strategy

Operation strategy is a strategy for the operations function that is linked to the
business strategy and other functional strategy leading to a competitive advantage to
the firm.

Operation strategy is concern with policies and plans for using the resources of a firm
to support its long term competitiveness. An operation strategy is involved with
decisions process to select appropriate technology, physical facilities and the
inventory.

Competitiveness:

Companies must be competitive to sell their goods and services in the market place.
Business organization competes through some techniques. Marketing influences
competitiveness in several ways including identifying customer’s wants and needs,
pricing, advertising and promotion.
Operations influences competitiveness through product services, design, cost,
location, quality, response time, flexibility, inventory and supply chain management
and service many of this are interrelated.

Tool in Inventory Management:

Economic order quantity model:

The basic decision in an economic order quantity (EOQ) procedure is to determine the amount of
stock to be ordered, at a particular time so that the total of ordering and carrying costs may be
reduced to a minimum point. A firm should place optimum orders and neither too large nor to
small. The EOQ is the level of inventory order that minimizes the total cost associated with
inventory. The EOQ model is based on following four assumptions:

(i) A firm has a steady and known demand of D units each period for a particular input.

(ii) The firm consumes the input at a uniform rate.

(iii) The costs of carrying stocks are a constant amount C per unit per period.

(iv) The costs of ordering more inputs are a fixed amount O per order. Orders are delivered
instantly.

A useful formula for calculating the optimum order quantity is:

EOQ = √2DO/ C

To show how we might use the formula consider exhibit III in which a firm has an annual
inventory requirement of 10,000 units. The accounting costs associated with placing an order
with the supplier come to Rs. 200 per order and the carrying costs of holding stocks are expected
to be Rs. 4 per unit.

Hence, D=10,000 units

0=Rs. 200

C=Rs. 4

EOQ = √2 x 10,000 x 200/ 4

= √10,00.000
= 1,000 units

Therefore, 1000 units should be ordered every 37 days.

The EOQ model is very simple one and its assumptions will be unrealistic in many applications,
in practice orders are not delivered instantly. The assumption of a constant usage of inventory
and known annual demand are of doubtful validity.

Definition: Buffer Stock

‘Buffer stock’ or ‘strategic stock’ or ‘safety stock’ or ‘buffer inventory’ is defined as a supply of
inputs held as a reserve in case there are future demand and supply fluctuations. It is the excess
inventory or safety stock, which retains some kind of buffer to protect in case of uncertain future.
Buffer stock may be found at all stages of the supply chain, and is intended to reduce the occurrence or
severity of stock-out situations and thus provide better line continuity and/ or customer service. Buffer
stock is used in production or other inventory situations to ensure that exceptional or unpredictable
shortages or demands can be met with some degree of certainty.Safety stock is generally held when
there is uncertainty in the demand level or lead time for the product.
The amount of buffer stock a business chooses to maintain regularly can dramatically affect their
operations. Too much buffer stock can result in high inventory carrying costs. Too less stock can cause
repeated occurrences of stock-outs. Hence, businesses need to maintain a fine balance and decide on
the amount of buffer inventory to be held.

Advantages of Buffer Stock :

1. Prevention from demand-supply fluctuations
2. Can result in stable revenue generation
3. By having buffer stock, opportunity losses do not occur

Disadvantages of Buffer Stock:

1. In case of shorter shelf life, the products can get damaged and be rendered useless.
2. Additional overhead costs in purchasing and storing this stock

Hence, this concludes the definition of Buffer Stock along with its overview.

Stock outs
The situation when a firm runs out of stock which results in shutdown
of slow down of production / sales.
This approach is designed to minimize the risk of stock outs at all costs. Particularly in
manufacturing
environment stocks-outs can have a disastrous effect on the production process.
There are two concepts associated with stock out cost. First one is maximum stock levels, which i
s defined
as the sum of reorder
level and reorder quantity and from this (minimum usage x minimum lead time) is
subtracted.
This stock level is a signal to the management that there should not be additional investment
in stocks
because that is not needed and will be
a useless. In other words, any investment over and above this level is
loss incurring.
The second is the minimum level of stock or also known as buffer stock. This level refers to a
warning to
the management that stock level is approaching to such a low level that could result in
a stock cost. We
compute this stock level as under:
Buffer stock = reorder level (average usage x average lead time)
In order to avoid stock out situation, a safety stock level should be procured and maintained.
Safety stock is the minimum inventory amount needed for an item, based on
anticipated usage and expected
delivery time of materials.
This cushion guards against unpredicted surge in demand or delivery time

What is Lead Time?

Lead time is the time it takes to process an order and receive the shipment of your products. It’s a critical
tool for calculating safety stock inventory, and for applying a correct reorder point formula.
It’s both dependent on your process for taking and placing orders – an Excel inventory management
system vs a cloud-based inventory management system – along with how efficient your supplier can
prepare and ship your stock.
For example, if you placed an order today, and receive a shipment in 8 days, your lead time for that
specific order with that specific supplier is 8 days.
Your lead time will most likely vary for each order, but if you want to know your average lead time, you
can use this formula:
The total number of lead times divided by the total number of orders placed.
i.e., if you order stock once a month for 6 months, your total number of orders placed would be 6.
Following this example, let’s assume these were your lead times:

January 8 Days

February 11 Days

March 9 Days

April 6 Days

May 7 Days

June 5 Days

Add up all the lead times (8+11+9+6+7+5) = 46.

Now just use our formula:
The total number of lead times (46) divided by the total number of orders placed (6) = 7.67
7.67 is your average lead time for this example.
Relative to your industry, the faster your lead time, the more efficient your entire supply chain will be –
which is just one of a handful of benefits of lead time reduction.
Lead Time Reduction Benefits
The major benefits of reducing lead times are reduced carrying costs, streamlined operations, and improved
productivity.
But the list doesn’t end there.
Here are a few more specific benefits of lead time reduction:
 Flexibility during rapid shifts in the market
 The ability to outpace your competitors with faster, more efficient output
 Quicker replenishment of stock to avoid stockouts, lost sales, and lost customers
 Meeting deadlines consistently and easily
 Increases in cash flow because of increased order fulfillment
This isn’t an exhaustive list, but gives you an idea of what you stand to gain if you can make even marginal
reductions in your lead time – which we’ll cover in the next section.

Reorder levels
Companies must identify how much inventory to re-order, and when to re-order. To do this the
company needs to identify a level of inventory which can be reached before an order needs to be
placed. This is known as the reorder level.

Calculating the re-order level (ROL)

When demand and lead time (the time to receive inventory from the time it is ordered) are known
with certainty the ROL may be calculated exactly, i.e. ROL = demand in the lead time.

Where there is uncertainty, an optimum level of buffer (or safety) inventory must be carried. This
depends on:

 variability of demand
 cost of holding inventory
 cost of stockouts.

In reality, demand will vary from period to period, and the reorder level (ROL) must allow some
buffer (or safety) inventory, the size of which is a function of maintaining the buffer (which
increases as the levels increase), running out of inventory (which decreases as the buffer
increases) and the probability of the varying demand levels.
Fixation of inventory levels b.) Maximum level

Explain the following terms related to inventory levels

a. Fixation of inventory levels : Fixation of inventory levels facilitates easy maintenance and contro
various materials in a proper way. However, following points should be remembered: Only fixation of
levels does not facilitate inventory control. A constant watch on the actual stock level of materials sho
kept so that proper action can be taken in time The levels which are fixed are not for permanent basi
subject to regular revision.

b. Maximum level : This is the top level which indicates that level of material stock should not excee
level. If it does, it may involve blocking of funds in inventory which may be used for some other usefu
purposes. This level is fixed after considering following factors:

- Maximum Usage
- Lead Time
- Storage facilities available
- Prices of material
- Other various costs involved like insurance, storage cost etc.
- Availability of funds for procurement of materials
- Nature of material
- EOQ

c. Minimum level: This level is fixed below the re-order level but above the danger level. The level o
should not be reduced below this level. If it does, then it involves the risk of non availability of materia
whenever required. This level is fixed after considering two factors: Rate of Consumption and Lead T

d. Re-order level: This level is fixed between maximum and minimum level in such a way that the re
of materials for the production can be met properly till the fresh supply of material is received. This le
material stock indicates that steps should be taken for procurement of further lots of material.

e. Danger level: This level is fixed below minimum level. If the stock reaches this level an immediate
must be taken by the company in respect of getting supply. This level indicates a panic situation for t
company as it has to make purchases in a rush which may involve higher costs.

ABC Classification / Analysis of Inventory

The ABC classification process is an analysis of a range of objects, such as finished products
,items lying in inventory or customers into three categories. It's a system of categorization, with
similarities to Pareto analysis, and the method usually categorizes inventory into three classes
with each class having a different management control associated :
A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for
a control scheme. Each category can and sometimes should be handled in a different way, with
more attention being devoted to category A, less to B, and still less to C.

Popularly known as the "80/20" rule ABC concept is applied to inventory management as a
rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory
remains in about 20% of the items.

This rule , in general , applies well and is frequently used by inventory managers to put their
efforts where greatest benefits , in terms of cost reduction as well as maintaining a smooth
availability of stock, are attained.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20
concept. Here, Rupee / Dollar value of each individual inventory item is calculated on annual
consumption basis.

Thus, applied in the context of inventory, it's a determination of the relative ratios between the
number of items and the currency value of the items purchased / consumed on a repetitive basis
:

 10-20% of the items ('A' class) account for 70-80% of the consumption
 the next 15-25% ('B' class) account for 10-20% of the consumption and
 the balance 65-75% ('C' class) account for 5-10% of the consumption

'A' class items are closely monitored because of the value involved (70-80% !).

High value (A), Low value (C) , intermediary value (B)

 20% of the items account for 80% of total inventory consumption value (Qty consumed X
unit rate)
 Specific items on which efforts can be concentrated profitably
 Provides a sound basis on which to allocate funds and time
 A,B & C , all have a purchasing / storage policy - "A", most critically reviewed , "B" little
less while "C" still less with greater results.

ABC Analysis is the basis for material management processes and helps define how stock is
managed. It can form the basis of various activity including leading plans on alternative stocking
arrangements (consignment stock), reorder calculations and can help determine at what intervals
inventory checks are carried out (for example A class items may be required to be checked more
frequently than c class stores

Inventory Control Application: The ABC classification system is to grouping items

according to annual issue value, (in terms of money), in an attempt to identify the small number
of items that will account for most of the issue value and that are the most important ones to
control for effective inventory management. The emphasis is on putting effort where it will have
the most effect.

All the items of inventories are put in three categories, as below :

A Items : These Items are seen to be of high
Rupee consumption volume. "A" items usually
include 10-20% of all inventory items, and
 account for 50-60% of the total Rupee
consumption volume.

B Items : "B" items are those that are 30-40% of

all inventory items, and account for 30-40% of
the total Rupee consumption volume of the
inventory. These are important, but not critical,
and don't pose sourcing difficulties.

C Items : "C" items account for 40-50% of all

inventory items, but only 5-10% of the total
Rupee consumption volume. Characteristically, these are standard, low-cost and readily
available items. ABC classifications allow the inventory manager to assign priorities for inventory
control. Strict control needs to be kept on A and B items, with preferably low safety stock level.
Taking a lenient view, the C class items can be maintained with looser control and with high
safety stock level. The ABC concept puts emphasis on the fact that every item of inventory is
critical and has the potential of affecting ,adversely, production, or sales to a customer or
operations. The categorization helps in better control on A and B items.

In addition to other management procedures, ABC classifications can be used to design cycle
counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times,
and C items only once, or not at all.

Suggested policy guidelines for A , B & C classes of items

A items (High cons. Val) B items (Moderate cons.Val) C item (Low cons. Val)

Very strict cons. control Moderate control Loose control

No or very low safety stock Low safety stock High safety stock
Phased delivery (Weekly) Once in three months Once in 6 months
Weekly control report Monthly control report Quarterly report
Maximum follow up Periodic follow up Exceptional
As many sources as possible Two or more reliable Two reliable
Accurate forecasts Estimates on past data Rough estimate
Central purchasing /storage Combination purchasing Decentralised
Max.efforts to control LT Moderate Min.clerical efforts
To be handled by Sr.officers Middle level Can be delegated

VED ANALYSIS
VED stands for Vital essential and desirable. Organizations mainly use this technique for controlling spare
parts of inventory. Like, high level of inventory is required for vital parts that are very costly and essential
for production. Others are essential spare parts, whose absence may slow down the production process,
hence it is necessary to maintain such inventory. Similarly, an organization can maintain a low level of
inventory for desirable parts, which are not often required for production.

In VED Analysis, the items are classified into three categories which are:

 Vital – inventory that consistently needs to be kept in stock.

 Essential – keeping a minimum stock of this inventory is enough.
 Desirable – operations can run with or without this, optional.

SDE Analysis
This analysis classifies inventory based on how freely available an item or scarce an item is, or the length of its lead
time. This is how the inventory is classified:

 Scarce (S) = Items which are imported and require longer lead time.
 Difficult (D) = Items which require more than a fortnight to be available, but less than 6 months’ lead time.
 Easily available (E) = Items which are easily available
If you have time you may test out all of these methods of Inventory Analysis to determine which one you are most
comfortable with. There are certain businesses that work better with one type of method than the other. Once you
find out which of these methods is perfect for you and your company, a positive R.O.I. is just within reach.

Just-In-Time Inventory System

During the 1960s and 1970s, Japanese automakers, especially Toyota, with the help of American
researcher W. Edwards Deming, started developing new strategies and processes to improve production.
One of the things they noted was that if a production process could minimize the amount of inventory they
had, it would save space and money. So, work began to develop methods of tracking and forecasting when
certain parts and inventory would be needed, so that it was ordered in smaller orders and stocked as the
production process required it, not as the vendor was able to supply it. This process became known as just-
in-time (JIT) inventory management. As other companies learned this concept, it took some practice to
make it effective; one risk of JIT is having a stock out, or running out of a product or material.
While the goal of JIT is to minimize the amount of inventory a company has to store and hold, that means
that if they don't forecast demand correctly, they may not have product when the customers are ready to
buy, or it may freeze the production line. That costs money as customers will go elsewhere to buy their
products. Successful JIT inventory management requires accurate and timely forecasting.

kanban
Kanban is a visual signal that’s used to trigger an action. The word kanban is Japanese and
roughly translated means “card you can see.”

Toyota introduced and refined the use of kanban in a relay system to standardize the flow of
parts in their just-in-time (JIT) production lines in the 1950s. The approach was inspired by a
management team's visit to a Piggly Wiggly supermarket in the United States, where Engineer
Taiichi Ohno observed that store shelves were stocked with just enough product to meet
consumer demand and inventory would only be restocked when there was a visual signal -- in
this case, an empty space on the shelf.

In manufacturing, Kanban starts with the customer’s order and follows production downstream. At
its simplest, kanban is a card with an inventory number that’s attached to a part. Right before the
part is installed, the kanban card is detached and sent up the supply chain as a request for
another part. In a lean production environment, a part is only manufactured (or ordered) if there is
a kanban card for it. Because all requests for parts are pulled from the order, kanban is
sometimes referred to as a "pull system."

There are six generally accepted rules for kanban:

1. Downstream processes may only withdraw items in the precise amounts specified on the
kanban.
2. Upstream processes may only send items downstream in the precise amounts and sequences
specified by the kanban.
3. No items are made or moved without a kanban.
4. A kanban must accompany each item at all times.
5. Defects and incorrect amounts are never sent to the next downstream process.
6. The number of kanbans should be monitored carefully to reveal problems and opportunities for
improvement.

The concept of providing visual clues to reduce unnecessary inventory has also been applied
to agile software development. In this context, the inventory is development work-in-progress
(WIP) and new work can only be added when there is an "empty space" on the team's task
visualization board.

UNIT-4

Supply Chain Management - Role of IT

Companies that opt to participate in supply chain management initiatives accept a
specific role to enact. They have a mutual feeling that they, along with all other
supply chain participants, will be better off because of this collaborative effort. The
fundamental issue here is power. The last two decades have seen the shifting of
power from manufacturers to retailers.

When we talk about information access for the supply chain, retailers have an
essential designation. They emerge to the position of prominence with the help of
technologies. The advancement of inter organizational information system for the
supply chain has three distinct benefits. These are −

 Cost reduction − The advancement of technology has further led to ready

availability of all the products with different offers and discounts. This leads to reduction of
costs of products.

 Productivity − The growth of information technology has improved productivity

because of inventions of new tools and software. That makes productivity much easier and
less time consuming.

 Improvement and product/market strategies − Recent years have seen a huge

growth in not only the technologies but the market itself. New strategies are made to allure
customers and new ideas are being experimented for improving the product.

It would be appropriate to say that information technology is a vital organ of supply

chain management. With the advancement of technologies, new products are being
introduced within fraction of seconds increasing their demand in the market. Let us
study the role of information technology in supply chain management briefly.

The software as well as the hardware part needs to be considered in the

advancement and maintenance of supply chain information systems. The hardware
part comprises computer's input/output devices like the screen, printer, mouse and
storage media. The software part comprises the entire system and application
program used for processing transactions management control, decision-making and
strategic planning.

Here we will be discussing the role of some critical hardware and software devices in
SCM. These are briefed below −

Electronic Commerce
Electronic commerce involves the broad range of tools and techniques used to
conduct business in a paperless environment. Hence it comprises electronic data
interchange, e-mail, electronic fund transfers, electronic publishing, image
processing, electronic bulletin boards, shared databases and magnetic/optical data
capture.

Electronic commerce helps enterprises to automate the process of transferring

records, documents, data and information electronically between suppliers and
customers, thus making the communication process a lot easier, cheaper and less
time consuming.

Electronic Data Interchange

Electronic Data Interchange (EDI) involves the swapping of business documents in a
standard format from computer-to-computer. It presents the capability as well as
the practice of exchanging information between two companies electronically rather
than the traditional form of mail, courier, & fax.

The major advantages of EDI are as follows −

 Instant processing of information

 Improvised customer service

 Limited paper work

 High productivity

 Advanced tracing and expediting

 Cost efficiency

 Competitive benefit

 Advanced billing
The application of EDI supply chain partners can overcome the deformity and
falsehood in supply and demand information by remodeling technologies to support
real time sharing of actual demand and supply information.

Barcode Scanning
We can see the application of barcode scanners in the checkout counters of super
market. This code states the name of product along with its manufacturer. Some
other practical applications of barcode scanners are tracking the moving items like
elements in PC assembly operations and automobiles in assembly plants.

Data Warehouse
Data warehouse can be defined as a store comprising all the databases. It is a
centralized database that is prolonged independently from the production system
database of a company.

Many companies maintain multiple databases. Instead of some particular business

processes, it is established around informational subjects. The data present in data
warehouses is time dependent and easily accessible. Historical data may also be
accumulated in data warehouse.

Enterprise Resource Planning(ERP) Tools

The ERP system has now become the base of many IT infrastructures. Some of the
ERP tools are Baan, SAP, PeopleSoft. ERP system has now become the processing
tool of many companies. They grab the data and minimize the manual activities and
tasks related to processing financial, inventory and customer order information.

ERP system holds a high level of integration that is achieved through the proper
application of a single data model, improving mutual understanding of what the
shared data represents and constructing a set of rules for accessing data.

With the advancement of technology, we can say that world is shrinking day by day.
Similarly, customers' expectations are increasing. Also companies are being

more prone to uncertain environment. In this running market, a company can only
sustain if it accepts the fact that their conventional supply chain integration needs to
be expanded beyond their peripheries.

The strategic and technological interventions in supply chain have a huge effect in
predicting the buy and sell features of a company. A company should try to use the
potential of the internet to the maximum level through clear vision, strong planning
and technical insight. This is essential for better supply chain management and also
for improved competitiveness.
We can see how Internet technology, World Wide Web, electronic commerce etc. has
changed the way in which a company does business. These companies must
acknowledge the power of technology to work together with their business partners.

We can in fact say that IT has launched a new breed of SCM application. The
Internet and other networking links learn from the performance in the past and
observe the historical trends in order to identify how much product should be made
along with the best and cost effective methods for warehousing it or shipping it to
retailer.

supply Chain Management Vs. Customer Relationship

Management
Supply chain management, or SCM, and customer relationship management, or CRM, are similar
in that they are both technology-driven business processes that emerged at the start of the 21st
century. Despite these parallels, they are very different in terms of their uses and effects in your
business.
Supply Chain Management Basics
Supply chain management is a collaborative process where product resellers work closely with
supply chain partners to deliver the best value to end customers or consumers. Software-based
solutions are used that allow resellers and vendors to sync inventory levels and ordering systems
for more efficient distribution and order fulfillment. Supply chain partners work together on
transportation and logistics to try to optimize the movement of goods from the manufacturing
level to wholesale or retail.
SCM Benefits
The main premise of supply chain management is that distribution channel members view
themselves as partners trying to deliver value to consumers. This is different from the traditional
vendor-buyer relationships. Rapid response to inventory needs and special orders, reduced
inventory levels and management costs and fewer stock-outs are among the tangible benefits of
SCM. For the companies involved, it allows them to manage costs and improve profit margins. A
side benefit of supply chain efficiency is more environmentally friendly transportation practices.
Customer Relationship Management Basics
Customer relationship management is a marketing system where companies use databases to
collect data on customers to build stronger marketing programs. In a company-wide CRM
program, the roles of each functional area are more customer-centric than they were prior to
CRM implementation. Marketing, sales and service emphasize targeting the right customers with
the best value to build long-term relationships. IT enables these functions by helping select and
manage use of the high-tech infrastructure. Human resources, finance and operations all take on
tasks related to customer objectives.
CRM Benefits
An overriding objective of CRM is to constantly improve the total customer experience through
ongoing research and better systems. Building and maintaining long-term relationships with your
core customers helps you optimize profitability. Using data gathered from customers allows you
to target specific customers with focused marketing to attract interest and reduce wasted
messages that would otherwise go to disinterested customers.

Benchmarking Defined
Before more recent technology was invented, surveyors would chisel a horizontal mark in a permanent
structure, where a tool could be placed in the indention to help create a benchmark with a level rod, helping
them and future craftsmen to have a point of reference for building.
In the business world, companies use benchmarking as a point of reference as well. But instead of having
physical benchmarks carved in stone, they use benchmark reports as a way to compare themselves to others
in the industry. Benchmarking is the practice of a business comparing key metrics of their operations to
other similar companies.
You can also think of a benchmark report as a dashboard on a car. It is a way you can quickly determine
the health of the business. Much like a dashboard, where you can check your speed, gas level, and
temperature, a benchmark report can examine things like revenue, expenses, production amounts,
employee productivity, etc.
Benchmarking occurs across all types of companies, including private, public, nonprofit, and for-profit, as
well as industries e.g., technology, education, and manufacturing. Many companies have positions or
offices in the company that are in charge of benchmarking. Some of the positions include:

 Institutional researcher
 Information officer
 Data analyst
 Consultant
 Business analyst
 Market researcher

Companies use benchmarking as a way to help become more competitive. By looking at how other
companies are doing, they can identify areas where they are underperforming. Companies are also able to
identify ways they can improve their own operations without having to recreate the wheel. They are able to
accelerate the process of change because they have models from other companies in their industry to help
guide their changes.

7 Steps To Implement A Supply Chain ERP System

Supply chain ERP solutions represent an underused approach that distribution companies could
take advantage of to increase efficiency.
A post on the Supply & Demand Chain Executive website reports that many distributors haven’t
implemented automated processes to help manage their supply chain. An Aberdeen Group study
two years ago found that almost half of businesses had yet to make the switch.
This post does a good job of outlining the steps required to roll out a supply chain ERP system.

1. Assemble the right group of people for the job before you start the project:Every part
of the business that will be affected by the change must be involved at some level. This includes
bringing on board employees in planning, procurement and information technology.
2. Evaluate existing systems: It’s crucial to examine your operations and to identify goals.
After you understand your goals, the next step is to consider the business requirements that support
those goals. The requirements can be broken up into two areas: key requirements and nice-to-
haves.

Key requirements must be included with the system, or else it’s not a candidate for
implementation. The nice-to-haves are requirements that you could work around if the system
didn’t offer them. Outlining and prioritizing requirements is critical to mapping out your
organization’s desired outcome.

3. See where there are gaps in time, data and collaboration within your operations: You
can find these by asking the right questions. While every business is different, there are some
general questions to explore. For example, what will the benefits be with more closely aligned
planning and procurement? Can the business work with suppliers in its existing procurement
system “using real-time demand and forecast data?”

4. Review all existing and prospective systems: You need to know in which areas your
existing system is falling short, as well as what the potential solution brings to the table. Some
systems may align well with the new technology, while others may not.
5. Choose the solution that works best for your organization: “Now that the leg work is
completed and a clear picture of the organization’s needs is established, choosing the right
technology is a matter of aligning priorities with capabilities and price,” the article says.

6. Bring suppliers on board: Identify and prioritize steps for integrating with suppliers. It
may be best to start out with a handful of suppliers, especially if you use the same systems.

7. Take it “one step at a time:” Complete the project in increments to ensure you’re putting
the right system in place for your organization and evaluate your progress along the way.

Strategic Outsourcing in Supply Chain Management

Strategic outsourcing is the alternative way for the company to accomplish its value chain activities rather
than performing the entire value chain activities. In the current market place there are quiet a good number
of companies that are specialized in some activities. Outsourcing these activities to the specialized
companies strengthen the companies’ business model either by improving the efficiency by decreasing the
cost or by enhancing the effectiveness by creating differentiating advantage in terms of quality, variety,
speed etc

Economic Dualism theory suggests that large companies create dual economy by subcontracting, in which
they can expand their resources in times of fortune and reduce capacity in times of recession, thus using
sub-contracting as a cushion against economic cycles. However this theory fails in present conditions
where subcontractors are seen as partners sharing risks, rewards and revenues (Paul D Cousins, 2003). This
outsourcing can be entire function like Nike outsourced its manufacturing function or it can be a part of the
function like many companies outsource the management of their payroll/pension systems while keeping
the HRM activities within the system. A survey estimates that some 56% of global product manufacturing
is exported to manufacturing specialists (Hill & Jones, 2008).
Evolution of Outsourcing Subcontracting model has changes drastically over last two decades. One of the
most common strategies was "Multiple Sourcing", which arises from the principle "Not to keep all your
eggs in one basket" which was adequate when competition is local or national. With companies becoming
global, competition has intensified, time to market cycles has to be kept low, increased innovations as
customers demanding high quality products, at competitive prices became difficult with multiple sourcing
strategy. This shifted the focus of companies towards "Parallel Sourcing" strategy where companies use
single source within model groups and multiple sources for different products. This provides buyer benefits
of sole sourcing like closer working relationships, information sharing etc and benefits of multiple sourcing
like security of supply and market pricing (Paul D Cousins, 2003).
This approach is followed by what is called "Network approach" which is complemented by concepts of
Supplier tiers. In this approach suppliers are organized into Tier I (Major assemblers) followed by Tier II
(Sub-assemblers). This kind of supply structure has become popular with in automotive and aerospace
industry where in it allowed buyers to work with fewer, sophisticated suppliers. As a result buyers rely on
fewer, powerful suppliers for supply of sub-assemblies (Paul D Cousins, 2003).
What to Outsource?
With customer being the key focus in these present dynamic environments, companies’ keeps on trying to
increase the total value generated to the customers by increasing the gap between customer willingness to
pay and costs associated with the product. To achieve this companies outsource activities that they think
the specialized company will generate more value by performing that activity. In the environment of
growing customer demand for supply chain efficiency and effectiveness it is recommended for the
company to perform the supply chain activities that it has distinctive competence and outsource the rest of
activities. Yet, not all processes are outsourced. Outsourcing the wrong process could be
counterproductive, expensive, or even fatal to a company (Andrea and Dana Meyer, 2002).
Core vs. Non-Core (Andrea and Dana Meyer, 2002)
The most crucial aspect of outsourcing is in making the distinction between the core competencies, which
should be kept in-house, and the non-core activities, which are candidates for outsourcing. Becoming
excessively dependent on partners reduces the strategic options available to a company. Processes that
nurture the core, protect the core, or help the company exploit its core competencies are also held
internally. Companies need to think carefully about what they wish to sow, nurture, and reap in-house in
order to harvest long-term profits.
Five-Stage Model (Andrea and Dana Meyer, 2002)
Prof. Fine enumerated five variables that predict the wisdom of in-sourcing vs. outsourcing.

 Modularity of components/processes: Modular elements are potential candidates for

outsourcing than integral elements of a product or business
 Quantity of providers: The fewer the number of providers, the less outsourcing makes sense
 Clock speed: The faster the clock speed, the more you want to in-source.
 Importance to customer: If the customer cares about it, don't outsource it.
 Benchmark performance level: if you have best-in-class performance on the process, don't
outsource it.

Value Equation (Andrea and Dana Meyer, 2002)

A value equation used by Unilever to evaluate the added value generated by outsourcing activities is
“Net Value = Internal Value from Focus + External Value from Provider - Transaction Costs”
This equation helps only quantitatively where as many qualitative parameters like whether the activity is
core or non-core should also be considered. For activities that are non-core, the equation helps the company
assess the value of outsourcing that non-core activity (Andrea and Dana Meyer, 2002).
Value Equation: Internal Value from Focus (Andrea and Dana Meyer, 2002)
With outsourcing, management and employees can focus more on what is important. So organizations
create more value by focusing their valuable resources on their core activities and thus increase the value to
the customer.
Value Equation: External Value from Provider (Andrea and Dana Meyer, 2002)
Providers can create value by being more efficient, more effective, or more innovative than the internal
counterpart. This value is the key part of the value proposition. The source of the provider's value can fall
into one of two categories:

 Value from high economies of scale

 Value from high levels of expertise.

Specialist provider achieves scale economies by aggregating volumes of activities from multiple companies
through standardization and decreases the unit costs across the supply network. Value from high levels of
expertise occurs when the provider can accumulate large quantities of knowledge that would be hard for
each client company to replicate.
Value Equation: Transaction Costs (Andrea and Dana Meyer, 2002)
Transaction costs are inevitable in the outsourcing. Costs of internal transactions which are in general
informal are very low and hidden where as the transaction costs with the outsourced company are visible
and substantial. Extra transaction costs arise from having to formally specify what the partner is to do,
managing that external activity. Companies decompose transaction costs into 3 categories:

 Oversight costs: Cost of managing the relationship, performance, information exchange etc.
 Switching costs: Cost of changing from in-sourcing to outsourcing
 Risk: The potential costs of problems associated with the outsourcing arrangement

Benefits of Out-Sourcing
Cost reduction and cost savings Out-sourcing reduces the costs if the price you are paying for the
company is less than the costs that you incur if the same activities are performed in-house. Specialist
companies are able to perform activities at a lower cost as they can realize economies of scale by
performing the same kind of activity for various companies. These specialized companies invest more in
efficient-scale manufacturing facilities/processes to spread the costs against large volumes and bring down
unit costs.
Specialists also save costs through learning effects more rapidly than the clients. These companies learn
fast how to operate the processes more efficiently compared to its clients. Since most of the out-sourced
companies are based at low-cost global locations, costs can easily drive down (Hill & Jones, 2008).
Enhanced Differentiation Companies should be able to differentiate its final products by out-sourcing
certain noncore activities. These companies can provide more reliable products by strongly focusing and
achieving competence in that activity thus decreasing the defect rate. Most of these specialized companies
have adopted Six Sigma methodologies and bring down error rates, thereby increasing the reliability of
product.
For example carmakers outsource specific kinds of vehicle component design activities such as microchips
and headlights to the specialists who have earned reputation for design excellence (Hill & Jones, 2008).
Focus on core business Strategic out-sourcing makes the managers to focus their energies and companies
resources in performing the core activities that can create sustainable have more potential to create value
and competitive advantage. By this companies enhance their competence and push out the value creation
frontier and create more value for their customers (Hill & Jones, 2008).
Flexibility Companies gain access to new technologies and use supplier’s technology to accelerate new
product development. Companies can also adapt to changing business environments by changing suppliers
if the existing suppliers using technologies that are obsolete. Thus companies mitigate the risk of investing
in resources/technologies that have short life cycles (Yijie Dou and Joseph Sarkis, 2010).
Access to knowledge pool Out-sourcing activities across the borders enables companies to access to
knowledge pool connected with products, processes and management strategies that prove to be effective
and efficient. It also makes the organization use new advanced technologies in product and process
development. By out-sourcing some of the value creating activities to Japan, many US companies exploited
the benefits of lean manufacturing that they cannot realize in the home country (Thomos L. Sporleder,
2006).
Additional Capacity Out-sourcing helps the companies to adapt to seasonal fluctuations in demand by
out-sourcing the need for extra products beyond the capacity of the organization rather that going for
Green-field expansions. In periods of low demand companies uses its resources in satisfying customer
needs and out-source the extra demand to out-sourced company in periods of high demand (Sunil Chopra,
2010).
Demand Uncertainty (Risk Pooling) In periods of demand uncertainty organizations finds it difficult to
manage additional costs associated with high inventory, lack of material in case of peak demands etc. By
out-sourcing, uncertainty in the demand can be reduced because of aggregating uncertainties across many
companies, supplier decreases the total uncertainty thus save these costs for the companies (Sunil Chopra,
2010).
Other than these, companies reluctant to make high capital investments, companies operating in product
categories with short product life cycles, companies planning to be quicker to the market in already
established industries out-source so as to decrease risks. Sometimes overhead costs of performing some
back office functions are more considering out-sourcing these functions thus controlling the costs.
Risks of Out-sourcing
Lacking control of operations Once the processes are out-sourced, the companies won’t have a complete
control mechanism to deliver the value as the out-sourced activities are out of company bounds. The
vendor for some reasons may fail to deliver leading to disturbance in the flow of activities that fulfill
customer order. So companies should have a contingency plan for these uncertainties. (Yijie Dou and
Joseph Sarkis, 2010).
Loss of Competitive Knowledge Organizations by out-sourcing activities lose the knowledgeable
resources they possess. They also lose their hold and competence on activity that they out-source. IBM by
outsourcing most of its activities in PC industry became the market leader at a faster pace. Later its strategy
was followed by other competitors like Compaq which out-sourced activities to the same suppliers and this
resulted in decrease in IBM market share from 40% to 8% in span of 10 years (Thomos L. Sporleder, 2006)
Companies must preserve and nurture some form of competitive advantage in the form of core
competencies. Most of the presenters stressed the importance of identifying a company's strategic core
competencies before outsourcing or partnering. A company that outsources its future has no future (Andrea
and Dana Meyer, 2002).
Risk of Holdup It is the risk associated with the dependence of the out-sourcing company for the
specialized value added activities. Increase in dependence tends to decrease the bargaining power of the
parent company. So a better alternative to mitigate this risk is to adapt a parallel sourcing policy, having
different specialist providers. Daimler Chrysler adopted this policy of parallel sourcing (Hill & Jones,
2008).
Loss of Vital Information Organizations out-sourcing important functions which get them in direct touch
with customers may lose important competitive information from the customer feedback. A good flow of
communication between the out-sourced and out-sourcing company can prevent this loss of information
(Hill & Jones, 2008).
It sometimes becomes mandatory for the company to share vital confidential information with the out-
sourced company. It can lead to leakage of valuable information the company shares in order to achieve
efficiency in supply chain operations.
Conceptual Foundations of Demand Chain, Value Chain, and
Supply Chain
of all supply chain members across the supply chain. Although supply chain management has
been hailed as an innovative way to compete in today’s business world, its concept created a lot
of confusion, as evidenced by the presence of more than 2,000 different definitions of supply
chain management (see Gibson et al., 2005). Adding to the confusion, the term supply chain was
often interchangeably used with demand chain and value chain. Therefore, it is important for us
to synthesize these terms and differentiate among them when appropriate.

Because the ultimate goal of supply chain management is to serve the customer better, supply
chain management begins with the understanding of customer values and requirements. Indeed,
Poirier (1999) argued that the primary objective of supply chain improvements was to serve
ultimate customers more effectively and therefore an analysis of the supply chain should focus on
the “finish line” (demand), not the “starting point” (supply). To enhance the customer values and
meet customer requirement, careful planning of demand-creation and -fulfillment activities is
critical to the success of the whole organization. This planning cannot be articulated without
understanding the dynamics of interrelated business activities and jointly developing ideas for
business process improvement among the intra- and inter-organizational units. Therefore, any
efforts geared toward the customer-centric and “pull” approach throughout the entire business
processes are considered part of the demand chain.

In a context similar to the demand chain, a value chain is referred to as a series of interrelated
business processes that create and add value for customers. Its intent is to disaggregate all of a
firm’s business processes into discrete activities to evaluate their level of contributions to the
firm’s value and then discern value-adding activities from non-value-adding activities. Herein,
“value is the amount buyers are willing to pay for what a firm provides them and thus is measured
by total revenue, a reflection of the price a firm’s product commands and the units it can sell”
(Porter, 1985, p.38). Thus, the extent of value created and added by the firm often dictates its
level of business success, because the higher the value, the greater the profit margin and
competitive advantages.

As shown in Figure 1.3, the value chain focuses on the customer’s value by connecting the
customer’s needs to every aspect of the value-adding business activities encompassing sourcing,
manufacturing, logistics, and marketing across the organizational boundary. The value chain is
often driven by four key imperatives (Bovet, 1999):

 Reduced uncertainty, which minimizes asset intensity through the reduction and
elimination of inventory
 Increased speed, which minimizes the risk of obsolescence
 Increased revenue resultant from the maximization of customization and the subsequent
customer loyalty
 Increased productivity through multiple asset productivity

Although Table 1.2 shows that the strategic focus and perspectives of the demand chain, the
value chain, and the supply chain are somewhat different from one another as described by
Sherman (1998, p 2), their fundamental concepts and ultimate goals are not distinctively different
in that all these concepts are customer-centric and stress the importance of coordinated linkage
between business activities to the firm’s competitiveness. Therefore, these three terms can be
regarded as synonyms. To put it simply, the supply chain originates at the sources of supply and
flows toward the customer, whereas the demand chain flows backward from the customer and
ends up with the enterprise. The value chain is created when the supply chain is in sync with the
demand chain. Regardless of the semantic differences, the supply chain benefit may be
maximized by following the seven principles outlined by Copacino (1997):

 Understand the customer values and requirements so that the firm can identify how to
align its operations to meet its customers’ requirements and needs.
 Manage logistics assets such as warehouses, terminals, transportation equipment, and
pipeline inventory across the supply chain with the help of both the downstream and upstream
supply chain partners.
 Organize the customer management in such a way that the firm can provide a single point
of contact to the customer for information and post-sales follow-ups.
 Formulate joint sales and operations plans as the basis for a more responsive supply
chain by sharing real-time demand and forecast information within and across the supply chain.
 Leverage manufacturing and sourcing flexibility by utilizing postponement strategies.
 Focus on the synergies of strategic alliances and relationship management by building the
sense of mutual trust and the spirit of gain sharing.
 Develop customer-driven performance measures to drive the behavior
Table 1.2. The Comparison of Demand Chain, Value Chain, and Supply Chain

Demand Chain Value Chain Supply Chain

The Role in Demand creation Demand performance Demand fulfillment

Demand Planning

Key Strategy Product strategy Financial strategy Channel strategy

Primary Activities New product development Cost accounting Pricing Revenue Procurement
Market research Sales and management Capital investment Manufacturing
promotion Forecasting Value-added services Logistics Payment

Key Stakeholders End customers Shareholders Supply chain partners

Logistics and Operations Management

Introduction
In today's global environment there is a growing realisation that everyone, everywhere has access to
the same underlying elements, including hardware, software and technology. It is the management of
these underlying elements which offers the greatest potential for developing a competitive advantage.
Consequently logistics and operations management is critical to the success of an engineering
company and is often referred to today as the supply chain management process which
encompasses all operations from the extraction of raw material, through manufacture to the recycling
of products at the end of their life. Logistics is recognised as a key function in meeting market
requirements quickly, flexibly and without incurring punitive inventory costs. This must involve the
management of external companies supplying materials or services to the company as well as the
management of operations within the company.

Objectives
On completion, participants will be capable of:

 Specifying the role and goal of the Logistics function within a company.
 Using the basic tools and techniques to plan and improve all aspects of the supply chain.
 Describing the control systems that can be used for operations management in a wide variety
of environments.

Contents
 Relationship of Logistics and Operations Management strategy with:
o Overall business strategy
o Manufacturing strategy
o Make/buy policy
o Manufacturing environment (make to order/ make to stock, job/batch/line/flow
production)
 Theory & principles of supply chain management
 Basic planning & control techniques:
o Forecasting demand
o Essentials of Industrial Engineering
o Capacity management
o Scheduling and sequencing
o Inventory management
o Planning & control systems and methodologies (Material Requirements
Planning, Manufacturing Resource Planning, Optimised Production Technology, Just In Time)
 Measuring performance in Logistics and Operations Management

Third Party Logistics (3PL) And Fourth Party Logistics (4PL)

What is a 3PL?
A third party logistics company is one that works with shippers in order to manage another
company’s logistics operations department. 3PL is the action of outsourcing activities that are
related to logistics and distribution.
What is a 4PL?
The concept of a 4PL provider is an integrator that accumulates resources, capabilities and
technologies to run complete supply chain solutions.
Main Difference between 3PLs and 4PLs
The 3PL targets a single function, whereas the 4PL manages the entire process. A 4PL may
manage the 3PL.

3PL
Third party logistics providers usually specialise in

 Integrating operations
 Warehousing
 Transportation services
 Cross-docking
 Inventory management
 Packaging
 Freight forwarding

These services are scaled and customised to the customer’s specific needs based on their market
conditions and the different demands and delivery service requirements for their products or
materials.
There are thousands of 3PLs in the market that offer different models and perform different
tasks. For example, certain 3PLs may only specialise in certain industries.
The 3PL have a large footprint throughout the country. This makes it viable for companies to
service clients in remote regions at a much lower cost than doing it themselves.
Types of 3PL Providers
1. Standard
Basic activities: Pick and pack, warehousing and distribution.
2. Service Developer
Value-added services such as tracking and tracing, cross-docking and specific packaging
3. Customer Adapter
This comes in at the request of a customer. It is when the 3PL takes over complete logistics of
the firm.
4. Customer Developer
This is the highest level of 3PL. This is when the 3PL integrates itself with the company, and ends
up taking over the entire logistics operation.
4PL:

Functions provided by a 4PL company

 Procurement
 Storage
 Distribution
 Processes

A 4PL company takes over the logistics section of a business. This could be the entire process, or
a side business that’s imperative to have as part of the main business.
An example here would be a bicycle importer. The main function is to import bicycles however,
they need to have spare parts for these unique bikes. A 4PL would manage the total logistic
operations for the spare parts business.

What is the bullwhip effect and How do you minimize it?

What is the bullwhip effect?

Imagine a person having a long whip in his hand, and if he gives a little nudge to the whip at the handle, it
creates little movements in the parts closest to the handle, but parts further away would move more in an
increasing fashion.

Similarly, in the supply chain world, the end customers have the whip handle and they create a little
movement in the demand which travels up the supply chain in increasing fashion. As we move away from
the customer, we can see bigger movements. On average, there are six to seven inventory points between
the end customer and raw material supplier (as shown below in figure 1). Everyone tries to protect
themselves from stock-out situations and missed customer orders, by keeping extra inventory to hedge
against variability in the supply chain. Hence, huge buffers of inventories up to six months can exist
between the end customer and raw material supplier. This bullwhip effect ultimately causes the upstream
manufacturers to have increased uncertainty which results in lower forecast accuracies leading to higher
inventories.

Definition of the bullwhip effect

The bullwhip effect is a concept for explaining inventory fluctuations or inefficient asset allocation as a
result of demand changes as you move further up the supply chain. As such, upstream manufacturers
often experience a decrease in forecast accuracy as the buffer increases between the customer and the
manufacturer.

How Do You minimize the bullwhip effect?

Every industry has its own unique supply chain, inventory placements, and complexities. However, after
analyzing the bullwhip effect and implementing improvement steps, inventories in the range of 10 to 30
percent can be reduced and 15 to 35 percent reduction in instances of stock out situations and missed
customer orders can be achieved. Below are some of the methods to minimize the bullwhip effect.

1.
1. Accept and understand the bullwhip effect

The first and the most important step towards improvement is the recognition of the presence of the
bullwhip effect. Many companies fail to acknowledge that high buffer inventories exist throughout their
supply chain. A detailed stock analysis of the inventory points from stores to raw material suppliers will
help uncover idle excess inventories. Supply chain managers can further analyze the reasons for excess
inventories, take corrective action and set norms.

2.
2. Improve the inventory planning process

Inventory planning is a careful mix of historical trends for seasonal demand, forward-looking demand, new
product launches and discontinuation of older products. Safety stock settings and min-max stock range of
each inventory point need to be reviewed and periodically adjusted. Inventories lying in the entire network
need to be balanced based on regional demands. Regular reporting and early warning system need to be
implemented for major deviations from the set inventory norms.

3.
3. Improve the raw material planning process

Purchase managers generally tend to order in advance and keep high buffers of raw material to avoid
disruption in production. Raw material planning needs to be directly linked to the production plan.
Production plan needs to be released sufficiently in advance to respect the general purchasing lead times.
Consolidation to a smaller vendor base from a larger vendor base, for similar raw material, will improve the
flexibility and reliability of the supplies. This, in turn, will result in lower raw material inventories.

4.
4. Collaboration and information sharing between managers

There might be some inter-conflicting targets between purchasing managers, production managers,
logistics managers and sales managers. Giving more weight to common company objectives in
performance evaluation will improve collaboration between different departments. Also providing regular
and structured inter-departmental meetings will improve information sharing and decision-making
process.

5.
5. Optimize the minimum order quantity and offer stable pricing

Certain products have high minimum order quantity for end customers resulting in overall high gaps
between subsequent orders. Lowering the minimum order quantity to an optimal level will help provide
create smoother order patterns. Stable pricing throughout the year instead of frequent promotional offers
and discounts may also create stable and predictable demand.

What is Warehousing?
Warehousing is the act of storing goods that will be sold or distributed later. While a small, home-
based business might be warehousing products in a spare room, basement, or garage, larger
businesses typically own or rent space in a building that is specifically designed for storage.

ADVANTAGES OF THIRD PARTY LOGISTICS

3 Major Advantages of Third Party Logistics

A third party logistics provider is a firm to which companies can outsource all or some of their supply chain
management functions. A good third party logistics provider is able to scale integrated operations, warehousing, and
transportation services to a company’s particular needs. For many companies, outsourcing these functions to a third
party logistics outfit is a wise choice for a number of reasons. Third party logistics can enhance efficiency, save
money, and allow companies to focus on their primary areas of business.

What Kind of Value Do Third Party Logistics Companies Offer?

A third party logistics firm can offer your company a number of key services, including:

 Logistics expertise
 Network analysis
 Mode and load network optimization
 Cost containment strategization
 Managing vendor compliance
 Systems support
 Customized Services

The expertise in supply chain management, warehousing, and other operations that a third party logistics firm can
offer is of substantial value to companies. Third party logistics can also be of benefit to shipping and carrying
companies. A third party logistics firm will help a company to maximize efficiency, eliminate weak points that result
in lost profits or revenue, and otherwise ensure maximal success and profitability.

The Three Key Advantages of Third Party Logistics

The following three key advantages make third party logistics outsourcing a smart and natural choice for all manner
of businesses.

#1: Cost Savings

Clients of third party logistics firms nearly always save money overall. Since logistics is the core specialty of third-
party outfits, their expertise in this area is nearly always superior to that of the shipping or production companies that
hire them. While companies may not have the time or expertise to keep IT systems updated, third party logistics
firms specialize in this, and are able to meet technical requirements more cost- and time-efficiently. Not only can a
third party logistics firm strategize to decrease a company’s overall delivery costs, they can also help improve
management to reduce inventory costs as well.

#2: Low Capital Commitment

When a company outsources logistics functions to a third party logistics firm, that company no longer needs to worry
about maintaining and managing their own warehouses and transportation systems. Not only will the third party
logistics firm manage warehousing, transportation, and other operations more efficiently and with more expertise
than the client would on their own, but the amount of capital needed to hire the third party firm is generally less than
would otherwise be needed for logistics operations.

#3: Freedom to Focus on Core Competencies

A third party logistics company specializes in logistics issues and operations. Business is complex, and it is difficult
or impossible for a company to have expertise in every single sector or division. When hiring a third party logistics
firm, you are hiring experts. This can free the client to focus time, energy, and resources on areas of core
competency. Instead of diverting capital, personnel, and other assets to managing logistics operations, those
resources can be used for the company’s actual business instead.

For many companies, the most efficient and cost-effective choice for supply chain management, warehousing, and
other logistics operations, is to outsource those functions to a third party logistics company. By hiring specialists who
will use their industry expertise to continuously optimize the supply chain for maximal efficiency and cost-
effectiveness, companies can divert resources to core areas of their business instead.
Decentralized Purchasing, Its Advantages And Disadvantages

Concept And Meaning Of Decentralized Purchasing

Decentralized purchasing refers to purchasing materials by all departments and branches
independently to fulfill their needs. Such a purchasing occurs when departments and branches
purchase separately and individually. Under decentralizedpurchasing, there is no one purchasing
manager who has the right to purchase materials for all departments and divisions. The defects of
centralized purchasing can be overcome by decentralized purchasing
system. Decentralized purchasing helps to purchase the materials immediately in case of an
urgent situation.

Advantages Of Decentralized Purchasing

- Materials can be purchased by each department locally as and when required.

- Materials are purchased in right quantity of right quality for each department easily.
- No heavy investment is required initially.
- Purchase orders can be placed quickly.
- The replacement of defective materials takes little time.

Disadvantages Of Decentralized Purchasing

- Organization losses the benefit of a bulk purchase.

- Specialized knowledge may be lacking in purchasing staff.
- There is a chance of over and under-purchasing of materials.
- Fewer chances of effective control of materials.
- Lack of proper co-operation and co-ordination among various departments.

Supply Chain Operations Reference (SCOR) model

Process reference models integrate the well-known concepts of business process engineering,
benchmarking, process measurement and organizational design into a cross-functional framework.
The Supply Chain Operations Reference (SCOR) model is unique in that it links business processes,
performance metrics, practices, and people skills into a unified structure. It is hierarchical in nature,
interactive and interlinked.

Toyota Production System

Toyota Motor Corporation's vehicle production system is a way of "making things" that is
sometimes referred to as a "lean manufacturing system" or a "Just-in-Time (JIT) system,"
and has come to be well known and studied worldwide.
This production control system has been established based on many years of continuous
improvements, with the objective of "making the vehicles ordered by customers in the
quickest and most efficient way, in order to deliver the vehicles as quickly as possible."
The Toyota Production System (TPS) was established based on two concepts: The first is
called "jidoka" (which can be loosely translated as "automation with a human touch") which
means that when a problem occurs, the equipment stops immediately, preventing defective
products from being produced; The second is the concept of "Just-in-Time," in which each
process produces only what is needed by the next process in a continuous flow.

Based on the basic philosophies of jidoka and Just-in-Time, the TPS can efficiently and
quickly produce vehicles of sound quality, one at a time, that fully satisfy customer
requirements.